US investors set to remain cool on China until after 2024 with ‘short-term return potential not optimistic’
- Number of deals involving US-based acquirers or investors related to Chinese targets decreased from 96 between January and November in 2021 to 45 last year
- Momentum is expected to return in 2024 amid an improving macro-environment, with the US presidential election set to take place in November next year
Geopolitical issues and high borrowing costs due to interest rate increases will continue to hamper the enthusiasm of US investors on making deals through merger and acquisitions, private equity and venture financing in China this year, according to industry insiders.
Figures from GlobalData, a London-based information services company, showed that the number of deal announcements involving US-based acquirers or investors related to Chinese targets decreased from 96 between January and November in 2021 to 45 during the same period last year.
But venture partners like Brian Buehling, who is also managing director at the Chicago-based technology firm Dakota Systems, said that the momentum will come back after 2024 when there is more clarity over the macro-environment, such as the completion of the US presidential election in November next year.
I’m not completely enthusiastic about deal activities in 2023 because US investors are waiting for economic stabilisation
“I’m not completely enthusiastic about deal activities in 2023 because US investors are waiting for economic stabilisation, especially regarding geopolitical issues and raising interest rates that lead to a higher borrowing cost,” Buehling said.
“The short-term return potential is not optimistic.”
Hopefully momentum will come back after 2024 when there is more global economic and geopolitical clarity, he continued, but “no meaningful progress” will be seen in the next 18 months.
An overall analysis by GlobalData indicated that a total of 14,937 deals were announced in the Asia-Pacific region in the first 11 months in 2022, representing a decline from 15,831 during the same period in 2021.
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China 2022 Year in Review
“Geopolitical issues mostly impact cross-border activity,” said GlobalData lead analyst Aurojyoti Bose.
“Most of the sectors recorded declines due to a dent in deal-making sentiment amid volatile conditions”, added Bose, which included a rise in coronavirus cases in China, according to GlobalData statement that accompanied the data.
Bose added that the technology sector, which traditionally accounted for the highest volume of deals among all sectors, also registered a decrease in the first 11 months in 2022.
China’s policy-driven economy has played a large role in its technological advancement in the face of US regulatory restrictions about investing in Chinese firms and Beijing’s emphasis on technological self-sufficiency and innovation, according to Michael Ignatius Ho, Asia director at Israel’s largest venture capital platform OurCrowd.
Investors across the globe lack alternatives but to pull and preserve their capital in the US
“The country’s technology development will be based on government-led investments and the private capital will follow the moves of the policy,” said Ho.
Overall, deal activities will continue to slow due to the sensitive US-China relationship in 2023, said Hugh Chow, a 30-year global executive in technology and a partner at the Greater Bay Area-based Radiant Tech Ventures.
In addition, he explained that the strong US dollar will also continue to keep capital in the US until it weakens.
“Investors across the globe lack alternatives but to pull and preserve their capital in the US,” added Ho.
After Fed’s rate hike, China’s economy seen benefiting from easing measures
US interest rates are expected to reach 5.1 per cent this year before easing to 4.1 per cent in 2024 and 3.1 per cent in 2025.
But Ho, who holds a relatively positive view, said the number of deals will rebound in 2023 due to the low comparison base last year.
“Investors will restart some of the halted deals due to a large-scale Covid lockdowns of last year,” he added.
“Together with the macroeconomic environment of higher interest rate [and] slower economic growth, deal flow and the amount of investment won’t catch up with the pre-Covid level in a short period of time.”
It’s only natural that money flows to wherever there is attractive returns
Despite the short-term gloom, Chow at Radiant Tech Ventures believes that China will continue to entice US investors in the long run due to its large and growing market.
“It’s only natural that money flows to wherever there is attractive returns,” he added.
Before the revival of investment sentiments in China begins, US investors will shift their focus to other Asian countries, including India, Indonesia and the Philippines, in the next 18 months because of their large and growing consumer markets, according to Buehling.
“More importantly, these countries have low labour costs and predictable regulatory environments, making them appealing for companies looking to diversify their supply chains,” he added.
