Sharp fall in Chinese M&As, takeovers

Industry experts point to government policies in the United States and China as the primary reason for the decline

The total value of Chinese takeovers of US companies has plummeted by 67 percent in the first three quarters of this year, according to a new report released by global research firm Rhodium Group in early November.

Bloomberg stated that the top US takeovers by Chinese companies in 2017 were worth less than $1 billion each. In contrast, this figure was more than $5 billion last year. In addition, the report found that Chinese companies’ investments around the world fell by 23 percent.

This drop in Chinese companies’ M&A volume comes on the back of the China government’s efforts to rein in overseas investment and ensure that they are in compliance with regulations.

The central government said before that it would help guide more investments into the real economy and reduce investments into sectors that Chinese companies are not proficient at managing.

According to the Ministry of Commerce, the nation’s outbound direct investment from non-financial sectors plunged 40.9 percent year-on-year to $86.31 billion between January and October.

Michael Froy, co-chair of the global corporate practice and global manufacturing sector at law firm Dentons, pointed out that the regulations set by the Committee on Foreign Investment in the United States (CFIUS) have also played a part in slowing the pace at which Chinese investments are entering the US.

“The Trump administration has taken a more restrictive view on foreign investments. The US Congress is considering legislation that would make a larger number of transactions to be subject to CFIUS view,” he explained.

At an operational level, Chinese investors have shown concern over the M&A process in the US, especially when it comes to one-on-one negotiations, the auctioning process and their understanding of compliance issues, he added.

However, Froy noted that Chinese investors should not be disheartened by these changes, as M&As have been the main channel for Chinese investors to enter the US.

Between 2000 and the third quarter of this year, Chinese companies have completed up to 660 M&As in a wide range of industries in the US, with the total transaction value amounting to $126.4 billion, according to Dentons.

Jason Cheng, senior partner at Dentons Shanghai, said that a number of government policies announced earlier this year will help Chinese companies to conduct M&As in a more sustained manner.

On August 18, the General Office of the State Council unveiled a guideline on overseas investments, defining the investment categories that the central government encourages, limits and forbids. In early November, the National Development and Reform Commission released a draft regulation regarding Chinese companies’ overseas investment as part of efforts to provide a public, transparent and clear systematic guideline for such activities.

“As the government’s supervision and execution policies become more transparent, Chinese companies will continue to expand their business in overseas markets in the long term,” said Cheng.

“We expect the number of M&A transactions to continue to grow in 2018, while the value will increase accordingly.”

Industry insiders at a ChinaCanada cross-border investments trends seminar in Shanghai held on Nov 14 by Dentons also said that Chinese companies should consider investing in privately-owned enterprises in Canada as the country has a sound economic system and transparent government policies.

Cherry Ma, a manager at the investor reporting department of Canadian firm Azimuth Capital Management, said her company has noticed that Chinese interest in Canadian companies has been growing since 2012. She added that there is still much room for cooperation between companies from the two nations in terms of energy.

Publicly available statistics show that the bilateral trade value between China and Canada reached $45.6 billion in 2016. However, experts pointed out that there is still much room for growth as this figure accounted for only 1.1 percent of the total foreign trade amount in China, and 7.2 percent of the total in Canada, last year.

In a bid to further boost trade between Canada and China, the two nations started discussing the feasibility of a free trade agreement in Beijing in late February. The Canada China Business Council estimated that the free trade agreement could result in Canada exporting an additional CAD$7.7 billion ($6 billion) worth of goods to China every year by 2030, and in the process create 25,000 job opportunities in China.

The former prime minister of Canada Stephen Harper, who was in attendance at the seminar, said that his country has only “scratched the surface” in the Asia Pacific region in terms of trade, and that Chinese companies should act now instead of wait for the free trade agreement to be implemented.