China’s merger and acquisition boom to continue this year, says PwC
The record level of China merger and acquisition (M&A) activity seen in 2016 was not an isolated spike according to PricewaterhouseCoopers (PwC), but rather the new normal.
The professional services firm expects deal activity to drop slightly this year due to government restrictions and an uncertain global outlook, but they predict Chinese M&A activity will nonetheless remain strong in 2017, and hit new record highs in 2018.
According to PwC’s “M&A 2016 review and outlook”, Chinese outbound investment was a main driver of the growth, resulting in a 142 per cent jump in the number of transactions compared with 2015, and a 246 per cent increase in value terms.
In total, Chinese outbound deals tallied US$221 billion in 2016, according to PwC’s calculations from publically available data.
Overall deal volume involving China, including inbound, outbound and domestic M&A was worth US$770 billion, PwC said.
David Brown, PwC China and Hong Kong transaction services leader said that M&A deals driven by financial buyers had become an important driver of outbound M&A growth with the number of deals doubling in 2015, and doubling again last year, to US$38.1 billion.
The largest transactions of this kind were dominated by what PwC calls “big asset management” investors, namely financial institutions, government-backed funds and investment arms of both privately-owned and state-owned enterprises.
“There has been a tidal wave of capital flowing out of these big asset management investors,” said Brown.
Drivers for the growth in outbound deals more broadly included Chinese companies’ demand for advanced technology, intellectual property and international brands to promote in China, as well as companies’ efforts to find new markets, and attempts to hedge against a declining yuan. Readily available financing made acquisitions more possible.
In 2017, PwC expects a slight decline in deal activity in comparison with 2016, owing to some short term factors.
At the end of 2016, a number of different Chinese regulators brought in rules increasing the scrutiny of outbound M&A deals and PwC expects that these will have a slowing effect on deal activity.
Some sectors, including real estate, will be hit comparatively hard by the regulations, while outbound investments which are considered to be strategic in nature will continue to be encouraged.
Other factors affecting outbound deal activity include delays in foreign currency approvals due to tighter restrictions aimed at stopping capital outflows, and political uncertainty both in the US, following the arrival of President Donald Trump in the White House, and in Europe, where significant elections in France, Germany and the Netherlands are adding to the uncertainty caused by Brexit.
Closer to home, the 19th National People’s Congress which will be held in November of this year might also contribute to a wait-and-see effect for Chinese companies, PwC said.
However, PwC predicted that internal Chinese deal volume would remain robust, and possibly benefit from the restrictions on outbound M&As, while those companies with access to US dollar capital would push outbound deals.
Nor will the restrictions interfere with the underlying factors driving outbound M&A growth.
“We don’t see concerns over political uncertainty elsewhere in the world stopping deals, but rather prolonging the observation period,” said Gabriel Wong, head of China corporate finance for PwC China and Hong Kong.