MANAGEMENT

Fitch: China's outbound M&A set for long-run growth despite dip

Outbound investment by Chinese corporates is likely to rise over the long term, with the authorities likely to be supportive of overseas acquisitions that allow corporates to acquire advanced technology and strategic assets, create job opportunities, and that further the country's Belt and Road Initiative, Fitch Ratings said recently in a statement.

The outbound M&A activity of Chinese corporates fell by 42% year-on-year in the first nine months of 2017 to US$96 billion, due to a tightening of the approval process for overseas acquisitions as part of the government's efforts to curb capital outflows since end-2016, Fitch observed.

Acquisitions by highly leveraged conglomerates in the property, hospitality, sports and entertainment sectors have faced particularly intense scrutiny, as reflected by a fall of almost 70% in property and entertainment overseas M&A.

China's regulation of some types of foreign acquisitions is likely to remain relatively tight in 2018, Fitch predicted. Meanwhile, a tougher stance from overseas regulators and regulatory uncertainty in the US could heighten deal execution risk for Chinese corporates. However, these challenges will not derail the globalization strategies of most Chinese corporates, which are still generally at an early stage, Fitch said.

Chinese regulators are likely to continue to provide a supportive political and financing environment for acquisitions that are aligned with China's "Go Global" strategy and "Made in China 2025" plan, the credit rating agency noted.

Major driver: Belt and Road 

The Belt and Road Initiative is also likely to remain an important driver of outbound investment, Fitch pointed out.

China's M&A activities in countries covered by the initiative increased to USD33 billion in 7M17, exceeding USD31 billion in all of 2016, according to Reuters, which is in sharp contrast to the decline in total outbound M&A this year.

M&A in these countries often benefit from favorable government policies, including simpler and quicker approvals from Chinese authorities, and supportive funding from state-owned banks and investment funds, the credit rating firm noted.

Tech and consumer-driven sectors to dominate

Chinese corporates' shifting focus towards "new economy" sectors is likely to mean less outbound M&A in the energy and commodity industries, which traditionally dominated, and more in technology and consumption-driven sectors, such as TMT, healthcare, consumer goods and high-end manufacturing, Fitch said, adding that five out of China's top 10 overseas acquisitions in 2016 were in the computer & software and manufacturing sectors, and none was in the mining sector.

Private companies have overtaken state-owned enterprises (SOEs) in overseas M&A transaction value, while appetite is switching away from resource-rich markets such as Australia, Canada, South America and Africa, in favour of the US, Europe and developed Asian economies, Fitch observed.

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