Corporate Financing Analysis - Chinese Outbound M&A To Continue Slowing Due To Political Headwinds - 30 OCT 2017

Thanks to the successful efforts of Beijing to curb capital outflows, the Chinese outbound M&A charge, which hit a record high last year, has been interrupted with cross-border acquisition activity by Mainland companies set to drop y-o-y in 2017 and, with all things being equal, fall further still across the course of H118.

Capital Controls Taking Effect

With the Chinese economy slowing, Mainland acquirers went out in search of deals across the globe that would provide them with new revenue streams and growth opportunities. This trend saw Chinese companies become the biggest spenders in the global M&A arena in 2016, knocking their US counterparts off top spot in the process ( see ' Chinese Slowdown Spurring M&A Charge ' , July 13 2016). Such a huge volume of cash rushing out across China's borders quickly evolved as a cause for concern for the Chinese authorities, however, with foreign reserves suddenly falling South and in need of replenishment. Indeed, the country's foreign exchange reserves reportedly dropped below the USD3trn mark back in February 2017, alerting Beijing of the need to act, and fast. This resulted in the Chinese government moving to increase restrictions on outbound M&A deals - especially in the property and entertainment industries - and by extension, outward investments in a move that that was formally endorsed by the State Council on paper in August of this year. This followed on from the State Administration of Foreign Exchange (SAFE) announcing back in January 2017 that companies needed to submit more documents to prove the authenticity of outbound M&A deals to the government, a move which is inevitable in order to increase the time required by an acquirer to process a deal from start to finish. More specifically, we expect China's outbound investment to wane in the coming few quarters as the government tightens both the approval and loan approval processes for overseas acquisitions. In particular, investment into real estate, hotels, cinemas, and sports clubs will face more downside pressure when compared with other industries. A shining example of this policy coming into practice came last month when the restrictions shelved Jardines' sale of Hong Kong hotel, The Excelsior, which owned by the Mandarin Oriental International, part of the Jardine Matheson conglomerate. However, we note that the state's policies are not uniform across all outbound deals: favourable government assistance will see Chinese companies continue to invest in the Belt and Road (B&R) initiative, providing a measure of support for investments.

Restrictions Slowing Deals
Announced Outbound M&A By Chinese Acquirers By Deal Value, USDmn
Source: Zephyr, a Bureau van Dijk product , BMI

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