Value of US deals in China sinks on rising trade tensions

HONG KONG, China (Reuters) — US corporate acquisitions in China collapsed to their lowest level for 14 years in the first half of this year, as trade tensions between the two countries and uncertainty about Chinese government regulations took a toll on deal making.

The value of mergers and acquisitions involving American companies in China dropped 32 percent to just $523 million in the six months to June 30 from $771 million in the same period last year, and were down 87 percent from $4 billion in the first six months of 2015, according to Thomson Reuters data.

Bankers and lawyers involved in deal making say that increasing signs of trade friction between Washington and Beijing are acting as a deterrent. The tensions were reflected at a meeting earlier this month when officials from the two countries failed to agree on major new steps to reduce the US trade deficit with China.

American companies do not want to make acquisitions in an environment where they could get caught in crossfire between the two governments, these sources said. That could happen if, for example, US President Donald Trump’s administration imposed punitive tariffs on Chinese steel and other products and Beijing retaliated with its own action against American goods or entities.

That in turn leads to the danger that American companies won’t be able to take full advantage of China’s still buoyant economic growth of just under 7 percent a year, adding further to the stresses in the trade and investment relationship between the two countries.

“The new norm for China and the US is to be at odds on trade issues. As of now, they are having huge differences with regards to the steel industry, huge differences with regards to trade imbalance,” said Roy Zou, a Beijing partner at law firm Hogan Lovells. “I don’t see a big increase in US investments in China.”

China’s Ministry of Commerce (MOFCOM) did not respond to Reuters faxed request for comment on the drop in US acquisitions. The decline is happening at a time when Chinese deals in the US are still rising, though opposition in Washington to certain kinds of Chinese purchases on national security grounds is also increasing and could add to tensions.

European companies’ deal making has also been declining but at a slower pace. Their acquisitions in China in the first half of this year were worth $223 million, against $268 million in the same period last year.

Foreign firms have complained for some time about not being offered a level playing field in China. Among their concerns are restrictions on foreign ownership in key sectors – including finance and technology – and various regulations that favor domestic firms over foreign rivals.

And all of this can make them think twice about pulling the trigger on a major acquisition, trade experts said.

“Foreign investors face explicit and implicit ownership restrictions in the most attractive sectors, and they are also not able to participate in the restructuring and consolidation of ailing industries,” said Rhodium Group economist Thilo Hanemann, who analyses China’s international investment position.

The American Chamber of Commerce in Shanghai said in its annual China Business Report published on July 12 that the Chinese government needed to halt policies and regulations that favor domestic firms over foreign businesses. The lobby group complained of long-established “systemic inequities,” in the report, which was based on responses from 426 AmCham member companies in China.

While buyers of assets in China have faced many such challenges before, they haven’t usually had to do so against such a backdrop of trade tensions and wider political uncertainty.

“There is a lot of grandstanding going on between the two countries,” said a senior M&A banker at a US bank in Hong Kong. “Not many would like to deploy a couple of billion dollars now when you are not sure of the regulatory landscape and what shape and form it would take.”

This picture is further complicated by the approaching 19th National Congress of the Chinese Communist Party, this autumn. The gathering is expected to lead to a consolidation of President Xi Jinping’s power.

Many of the organs of the party and government are focused on making sure the Congress, which is held every five years, goes off without a hitch and that there isn‘t any kind of economic or political schism in the months leading up to it.

“Chinese economic bureaucracy is now dominated by a desire to manage systemic risk in preparation for the upcoming 19th Party Congress,” said Brock Silvers, managing director of Kaiyuan Capital, a Shanghai-based investment advisory firm.

“Any policies or reforms to be adopted after the Congress are still unknown,” he said, adding last week his firm advised a US private equity fund to postpone plans for China investments until regulatory issues are clarified.