Investment patterns in China are changing. Interest from European companies in acquiring Chinese assets, including state-owned enterprises intensified last year, while the US-China trade war made American firms cautious and also curtailed outbound investments by Chinese companies, according to investment bankers. “As China continues to seek to attract foreign investment in larger SOEs which are undergoing reforms to make them more competitive, that creates many opportunities for foreign investors,” said Samson Lo, head of mergers & acquisitions, Asia at UBS. China embarked on a revamp of its state-owned enterprises in 2015 to tackle rising corporate debt and also to make them more profitable and responsive to market forces. China consumer market ‘too big to ignore’, to attract domestic and foreign M&A activity amid trade war “Over the last two years, SOE restructuring has tended to be overshadowed by Chinese outbound investment but it is likely to become more prominent,” said Lo. China’s outbound investments stood at US$200 billion in 2016 but fell to US$70 billion in 2018 and is likely to fall further this year. However, the decline in M&A activity will be offset by inbound investment, as well as by transactions arising from the establishment of joint venture deals and the restructuring of SOEs in China. “The escalation in trade tensions between the US and China has made US companies cautious and, while it is unlikely there will be a pickup in activity in the near term, more companies from across Europe are buying assets in China,” he said. There were 49 deals in China involving European companies last year, up from 32 per cent in 2017. Their value meanwhile jumped 856 per cent to US$9.94 billion from US$1.04 billion in 2017, according to data from financial markets platform Dealogic. One of the biggest deals last year was Dutch brewer Heineken’s acquisition of a 40 per cent stake in state-owned CRH Beer for US$3.1 billion. The escalation in trade tensions between the US and China has made US companies cautious SOEs willing to sell a majority stake are of particular interest to international buyers not only because of the bridgehead they offer into the mainland but also because of the good relationships that the SOEs typically have with the Chinese government. Raghu Narain, head of investment banking at Natixis Asia-Pacific, said that for European firms it is “all about trying to get growth” which is what China offers. “They are all looking for high quality growth in producing assets that can leverage China,” Narain said at the Hong Kong M&A forum hosted by Mergermarket and AVCJ on Thursday. According to UBS’ Lo, the sectors where the Chinese government has relaxed restrictions such as insurance, asset management, banking and automobiles are attracting the most foreign investments, while consumer and health care continue to remain popular. The New York-based investment bank adviser BDA Partners believes the Chinese government will not ease investments into sectors like telecoms, financial services or oil and gas. “But in sectors like the car industry, which has been opened up, there might be opportunities for foreign buyers, regardless of whether they are from the US or EU,” said Charles Maynard, founding partner of BDA Partners. On Chinese firms’ M&A outlook, Lo said that Nordic countries and Australia were particularly popular destinations last year as the US and Europe intensified deal scrutiny. Additional reporting by Xie Yu and Daryl Cho