China's outward M&As may shrink in 2017, says sector expert

An employee counts yuan banknotes at a bank in Huaibei, Anhui province, June 22, 2010. [Photo/Agencies]

Increasing protectionism in a number of countries including the United States, tighter local supervision, and fluctuating exchange rates are factors that could come into play and become a drag on the pace and size of international Chinese corporate takeovers in 2017, Shanghai-based M&A information provider Morning Whistle has found.

After reaching a record last year, China's outbound merger and acquisition activities may shrink 20 to 30 percent by transaction volumes in 2017, according to Morning Whistle.

"Foreign regulators are likely to probe deals more frequently amid rising protectionist and xenophobic sentiment," said the advisory firm's vice-president Luo Xiaojun. "At home, closer scrutiny of big-ticket purchases is also decelerating the process."

Chinese investments in the European Union and the US might face increasing impediments, Luo said, as countries appeared increasingly reluctant to greenlight Chinese investments and were ready to subject China's M&A targets to extra scrutiny in the name of national interest.

Additionally, in January, China's top banking watchdog called for commercial banks to strengthen the risk and compliance management of their offshore branches in funding overseas investments.

That was after the State-owned Assets Supervision and Administration Commission issued a list of overseas projects that large SOEs were prevented from investing in.

Another negative factor is the fluctuating exchange rate, which has also proven to be a common headache for Chinese bidders, after the yuan depreciated about 6.6 percent last year against the greenback.

But Morning Whistle's Luo said Chinese companies still had enthusiasm for buying assets in North America and Europe, because a lackluster economic recovery in the West had seen price tags fall, and overseas expansion could offset a slower growth at home.

Chinese companies signed 729 overseas takeover deals last year, up 73 percent from 2015, the report said.

Morning Whistle said there were 500 deals where companies revealed transaction details. Chinese buyers spent $331.9 billion on these purchases, representing 94 percent increase over the same period in 2015.

Whereas Chinese overseas deal-making was previously driven by government policy, private companies completed 71.1 percent of overseas takeovers last year.

The biggest Chinese deal struck last year was the near $10 billion purchase of the aircraft leasing group owned by US-based CIT Group Inc, by a company controlled by China's HNA Group, said Han Qi, senior analyst at Morning Whistle.

It was followed by Tencent's acquisition of Finnish game developer Supercell at $8.6 billion, and the $7.3 billion purchase of the Port of Melbourne, Australia's busiest port, by a consortium including China Investment Corp.

"Takeover priorities will shift from resource-rich sectors to technology and consumption-driven industries, as China rebalances from being an export-driven manufacturing economy to one fueled by technology and the consumption of the rising middle class," Han said.

He said technology, media and telecom would continue to be the most invested industries for buyers this year, followed by manufacturing and medical instruments. Interest in real estate and entertainment might subside due to tighter rules on overseas acquisition in these sectors, Morning Whistle said.

The more cloudy M&A outlook is less likely to affect legitimate transactions and companies that have a genuine, substantial and long-term goal overseas, said Yu Chengzhi, partner at Grandall Law Firm in Shanghai, who has handled more than 40 Chinese overseas M&As.

"Regulators are exercising more control which is necessary ... they will take a closer look at whether the purchase is in line with the investors' core business," said Yu.