Re­cent changes bode well for M&As

China Daily European Weekly - - COMMENT - Andy Bell The au­thor is chair­man and head of Europe for DealGlobe. The views do not nec­es­sar­ily re­flect those of China Daily.

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.

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