Foreign companies on China M&A deal spree as Beijing further opens up financial, auto sectors – Yahoo Finance

by admin on June 25, 2020

Wall Street banks and carmakers led foreign companies into China this year as the government eased ownership limits and economic recovery hopes grew. Chinese investors, bothered by greater scrutiny overseas, simply flexed their financial power at home.

Inbound mergers and acquisitions (M&A) reached US$13.4 billion this year through June 19, versus US$12.5 billion of outbound deals, according to data provider Refinitiv. This would be the second straight year the scale is tipped at half-year mark. Such a feat has not happened on an annual basis since 2005.

“With China’s further opening up, the enthusiasm of foreign investors on mergers and acquisitions in mainland China will gradually increase,” said Cherrie Shi, senior counsel at the law firm FenXun Partners in Shanghai. Liberalisation policies have laid the foundation for higher levels of foreign investment, she added.

The foreign appetite in M&As in China came against the backdrop of rising tensions and economic calamity caused by the US-China trade war, the coronavirus pandemic and new security laws in Hong Kong. They have stoked global concerns about Chinese-funded deals in sensitive industries, forcing Chinese buyers to focus at home.

The likes of Goldman Sachs, JPMorgan Chase, HSBC and UBS have helped propel a rash of deals to acquire controlling stakes in their mainland securities, insurance and fund management joint venture units. German carmaker Volkswagen was the highlight in the auto sector.

German carmaker Volkswagen agreed to pump more than 2 billion euros (US$2.3 billion) to acquire a 50 per cent stake in the parent of its Chinese electric-vehicle joint venture and to buy a 26 per cent stake in a Chinese battery supplier.

“Foreign appetite for assets in China will remain robust, despite the chorus of political decoupling and economic reshoring talk, as long as China represents a sizeable share of global growth,” Rhodium Group partners Thilo Hanemann and Daniel H. Rosen wrote in June 18 report. “Over the past 18 months, we have recorded levels of foreign M&A into China that were not seen in the previous decade.”

Meanwhile, China-bashing has only grown louder. In addition, the EU unveiled a plan on June 17 designed to protect European firms from foreign state-subsidised predators. Chinese investors thus kept their voracious appetite overseas in check.

Overall, the value of China-targeted deals rose 3.1 per cent to US$156.3 billion through June 19, according to Refinitiv. That compared with a 68 per cent collapse in US-targeted deals and a 5.3 per cent decline in deals in Asia-Pacific during that period.

“The single market is key to Europe’s prosperity,” Margrethe Vestager, the EU’s competition commissioner, said in the June 17 statement. “But it only works well if there’s a level playing field.”

She previously warned the EU should be “vigilant” about potential deals by Chinese firms as Europe recovers more slowly from the coronavirus pandemic.

“Europe is indeed open for business obviously, but people should come here for the right reasons,” Vestager said in a Bloomberg TV interview on May 19. “To do business, not to come in with subsidies from third countries or to take technology out of the technology they acquire.”

Alan Wang, a partner at law firm Freshfields Bruckhaus Deringer, said much of the activity domestically this year centred around China becoming more self-reliant in technology and other sectors as the geopolitical tensions worsens.

He pointed to a US$2.2 billion investment by state-backed funds in May into Semiconductor Manufacturing International Corporation, the mainland’s biggest semiconductor chip maker, as one example.

“You are probably going to see the state-backed funds becoming a lot more active in terms of those domestic investments and in some other areas where the Chinese government wants to push for more investment,” Wang said.

The biggest China deals this year have included China Zhongwang Holdings US$6.6 billion sale of its extrusions arm ahead of a back door listing and the US$6.4 billion privatisation of online classifieds group

Also notable was Bank of Jinzhou’s US$6.4 billion equity sale to investment vehicles controlled by the Bank of China and the Liaoning province government as part of a capital injection plan, according to Refinitiv.

Private-sector deals remain challenged as many firms are “struggling” in terms of their balance sheets and cash flows, Wang added.

Is there an upside for China in the US-EU tariff row?

The value of outbound deals by Chinese firms in the first five months of the year was equivalent to HNA Group’s US$6.5 billion purchase of a 25 per cent stake in Hilton Worldwide Holdings in 2016, the law firm said.

Cross-border activity by Chinese firms is likely to remain muted in the second half of the year as lockdowns end and the global economy slowly recovers from the coronavirus pandemic, deal makers said.

The economic slowdown continues, there is little liquidity in the market and it is more difficult for companies to travel to complete a deal because of measures to slow the spread of the coronavirus, according to Bee Chun Boo, a M&A partner at Baker McKenzie in Beijing.

“Increased levels of protectionism also have significant impact on Chinese outbound investments and it is likely that investment flows will favour countries which provide more deal certainty to Chinese investors,” he said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.

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