Foreign direct investment statistics are not supporting what appears to be a boom in mergers and acquisitions (M&A) involving mainland companies.
Markets are running hot as multinationals invest on the mainland. At the same time mainland companies are looking for opportunities overseas in multiple sectors including financial services, real estate, automotive, infrastructure and construction and, of course, natural resources.
'We are busier than we have been in the past 18 months and the amount of time we are spending on overseas transactions is significant,' says Robert Partridge, Ernst & Young's transaction advisory services leader for the Far East. New sectors where M&A activity is increasing include insurance-related and pharma-bio-life science opportunities in consumer product and retail areas.
'It's like the valve started opening up in January. There has been no curbing of the appetite at all. Instead, there has been nothing but encouragement to mainland companies to go overseas and look for new opportunities,' Partridge says. 'We have also seen an incredible increase in multinational inbound activity. The data on FDI [foreign direct investment] over the first few months of this year doesn't clearly support this activity because there is a time lag between when companies start to look for a deal and the announcement of that investment.'
The increase in inbound activity does not seem to have been affected by the Ministry of Commerce (Mofcom) amendment in June last year to the rules on the mergers and acquisitions of domestic enterprises by foreign investors. This means that overseas investors have to file an application to Mofcom if their proposed deals are up to the sales revenue threshold set by the regulations on business concentration.
'Everyone has been expecting the amendment for the last year-and-a-half, so it is not a surprise. The authorities just want to make sure that they are taxing transactions that were set up solely for the purpose of avoiding tax in China,' Partridge says. 'Having said that, every time a new rule comes out in China, foreign investors get worried about how it is going to be implemented, so it has dampened some M&A appetites. But people are living with the fact that the days of creative tax avoidance in China are over.
'This amendment will also migrate a lot more of this M&A investment onshore, which is clearly an objective of the Chinese government, and will also therefore increase the ability to bring investment opportunities funded by renminbi versus dollars and create more investment opportunities onshore for the general investing community.'