China’s M&A loans slump for second year due to US trade war tensions

Chinese acquisition-related loans look set to end 2018 lower for the second year running with prospects of a turnaround looking dim as a trade war with the United States crimps appetite for overseas deals.

Event-driven loans made by Chinese firms in foreign currencies are down 41 per cent this year to US$18.2 billion from US$30.7 billion in 2016, according to Bloomberg-compiled data. Those deals include acquisition financing, leveraged and management buyout facilities and secondary buyout loans.

Overseas volumes have slumped amid tighter Chinese government scrutiny and a crackdown on capital outflows.

As the US trade war with China persists and deal makers meet resistance from foreign regulators, the environment will continue to be challenging, according to Standard Chartered Plc.

“Chinese buyers are now more likely to sit on the sidelines, awaiting a clearer picture on regulation and trade tensions,” said Lyndon Hsu, global head of leveraged and structured solutions at Standard Chartered in Singapore.

How far will China go to stimulate its economy next year?

“China [mergers and acquisitions] loan activities will continue to be dampened depending on the trade tension outcomes and continuing external regulatory scrutiny.”

Chinese companies went on an overseas buying spree in 2016, targeting corporate trophies around the world as weak economic growth at home limited domestic opportunities.

The sharp surge drew international regulatory scrutiny, while Beijing took steps to curb capital flight and weakness in its currency.

Among the largest loans completed so far this year include a US$3.38 billion, five-year loan for a consortium led by China Vanke Co. and private equity firm Hopu Investment Management Co. to back the purchase of Singapore warehouse operator GLP Pte.

Lukewarm acquisition activities from China helped drag mergers and acquisitions financing in Asia-Pacific, excluding Japan, to a three-year low, sinking for a second consecutive year.

What they said …

Lyndon Hsu, Standard Chartered in Singapore

“The reduction in [mergers and acquisitions]-related loan volume can be meaningfully attributed to the declines in China outbound flows to the US, Europe and Australia, amid the backdrop of China-US trade tensions this year.

“Assets bound by strategic and national interests have drawn greater scrutiny from US and [European Union] authorities. Chinese buyers will still be interested in non-strategic and non-national interest targets overseas as their domestic economy exhibits signs of flattening.”

How did China’s central bank respond to the US Fed raising its rate?

Yuanyuan Fan, managing director of mergers and acquisitions finance, investment banking at China Merchants Bank Co. in Shenzhen

“The China-US trade tensions and resistance from European regulators on Chinese investments have been the main issues.

“The decline is also due to a significant drop in the number of China firms’ delisting activities from overseas stock markets and relisting at home as the difference in valuations in respective markets is narrowing.

“Demand for overseas acquisitions by Chinese firms will be always there, more depending on external uncertainties.

“We expect to see more loan opportunities in their outbound investments into not-so-sensitive sectors such as consumer products. If China-US trade talks have a breakthrough, acquisitions of low-tech companies could be more.”