Recent changes bode well for M&As
The authorities and referees have changed, but players will learn to play within the new rules
This is set to be a major year for Chinese mergers and acquisitions. The 19th National Congress of the Chinese Communist Party, held in Beijing in October, saw the approval of significant reforms that will further open up the country to foreign investors. Under changes to the M&A transactions regime, approval from the State Council is no longer necessary for deals. And for any nonsensitive deals, pre-deal reporting from provincial authorities has been scrapped. It is not a coincidence that these reforms make the system function in a way more suited to Western M&A practices.
The changes may not seem enormous, but the direction is worthy of attention: The framework around China’s outbound M&A is maturing in a manner that is strategic and rational. No business can ignore the most powerful political and economic shift of our times: the growing significance and influence of the most populated country on the planet. China, in a few brief years, has become a major player on the global economic stage. And cross-border M&A is a valuable tool for China in its progress toward greater international engagement and future economic growth.
The country’s admittance to the World Trade Organization in December 2011 was a key milestone in this move from isolation to liberaliza- tion. Since then, the government’s acceleration of domestic reforms has driven rapid economic growth. The leadership seems to recognize that the continuation of this growth is best sustained through international business.
But although the current growth rate of around 7 percent is very strong compared with the rest of the world, it is half that of 2007, and the government is working hard to manage it through the internationalization of the Chinese business community. Mergers, or more particularly acquisitions, can deliver near-instant changes to businesses and economies. China had this in mind when actions were first taken in May 2014 to encourage overseas investment and cross-border M&A. These policy changes were spectacularly successful: The total value of outbound Chinese M&A went from $60 billion in 2014 to $215 billion in 2016, a compound annual growth rate of nearly 200 percent.
Lessons from this experience have been absorbed and, in a natural maturing of the market, M&A laws and regulations continue to be refined. Changes in recent years include the identification of certain sectors to be officially encouraged, such as those that promote the Belt and Road Initiative. To some observers, this may seem a rather vague effort to capitalize on a nostalgic view of cross-land trading. But to many, it is a real growth engine based on infrastructure and related industries.
Other sectors that are officially encouraged include those that will improve China’s technology or research and development capabilities. Think high-end industrial sectors like robotics, artificial intelligence and the internet of things, as well as healthcare, where there is a growing demand for improved medical services and access to scientific advances. To balance those industries that are approved, meanwhile, there are the more “sensitive” sectors including real estate, hospitality, media, entertainment, gambling and sports clubs. If you are left holding a football club now, the music has stopped, and you might want to look elsewhere for your buyer.
So now, adding to this, we have the most recent changes: the approval regime reforms agreed to at the Party congress. These do away with other restrictions from the previous era, under which large deals in sensitive sectors or regions had to be approved by both the Ministry of Commerce and the State Council. Even most other deals used to require some sort of approval and post-transaction monitoring by the provincial authorities; the scrapping of these requirements is yet another indication that the Chinese government recognizes the importance of internationalization to the country’s continued success.
A helpful way to view the Chinese economy as it affects outbound M&A is to think of a large group of highly entrepreneurial, commercial players acting within the constraints laid out according to the long-term objectives of a government that has a clear strategic vision. The constraints outlined by the government have been adapted in the light of recent experience. But the system, the players and the long-term objectives haven’t shifted. The route ahead is toward an increasingly globalized Chinese economy and continued growth in outbound Chinese M&A.
Chinese entrepreneurs see that the rules they act under have been altered. The authorities and referees have changed, but the players have remained the same and they will learn to play within the new rules. The game itself has not changed and will continue to thrive.