Home / World Economy / World Economy News / Fitch Ratings: China’s Outbound M&A Likely to Fall Further in 2019

Fitch Ratings: China’s Outbound M&A Likely to Fall Further in 2019

Chinese corporates’ outbound M&A activities fell in 2018 and are likely to drop again in 2019, due to increased regulatory scrutiny from the US and Europe, a less supportive approach from the Chinese authorities, growing US-China trade tensions, and tight funding conditions, says Fitch Ratings. Overseas M&A activities from private-owned enterprises (POEs) are likely to slide the most, as they have weaker access to external funding channels than state-owned enterprises (SOEs). We view the slowdown as generally positive from a credit perspective, as it limits risks stemming from increases in leverage to support M&As.

The surge in China’s outbound M&A in 2007-2016 was mainly driven by Chinese corporates’ globalisation strategies and supportive political and financing conditions. Total announced deals hit a record high in 2016. A sharp drop of around 50% followed in 2017 as credit conditions tightened and the authorities moved to curb capital outflows and cracked down on leveraged acquisitions in the property, hospitality, sports, and entertainment sectors. The downward trend continued last year, with total value of announced outbound M&As falling by 7.3% yoy in 9M18.

The impact of US-China tensions and heightened regulatory scrutiny under the Trump Administration is evident in the disproportionate drop in acquisitions in the US, which plummeted by 78% in 2017 to USD13.6 billion. Acquisitions in the US are on track to fall again in 2018, with just USD5.8 billion announced in 9M18. The wide gap in negotiating positions between the US and China suggests potential for continued trade tensions and resistance to Chinese investment in the US.

Asia and Europe have overtaken the US as the top outbound M&A destinations since 2017. Singapore was the most popular destination, accounting for 18.4% of total outbound M&A in 2017, reflecting its role as a financial hub in south-east Asia, which is one of the regions targeted by China’s Belt and Road Initiative (BRI).

China’s outward direct investments (ODI) in non-financial sectors in countries linked to the BRI increased by 12.3% yoy to USD10.8 billion in 9M18, outpacing China’s overall ODI growth of 5.1%. The BRI has been subject to increased domestic and international scrutiny over the past year, with questions about lending terms and conditions and the economic returns of a number of high-profile projects. In addition, some recipient countries have come under severe balance of payments pressure. The initiative still appears to be a priority for the Chinese government, but there is anecdotal evidence that it may be taking a more cautious approach and encouraging domestic banks to undertake stricter due diligence to limit damage to the programme’s international reputation and the risk of bad loans.

Outbound M&A activities of SOEs and POEs declined by more than 50% in value terms in 2017, but the slide was sharper for POEs in 1H18, at 30% yoy, compared with 11.2% for SOEs. POEs tend to have weaker access to bank funding than SOEs, and so have been more affected by tighter credit conditions, especially those with weak credit profiles. We expect POEs’ outbound M&A activities to remain muted in 2019, as a recent step towards monetary easing is unlikely to significantly improve their funding access. Slowing domestic economic growth and continued liquidity pressure will also dampen POEs’ appetite for outbound investments.

Oil & gas and power & public utilities were the two largest sectors in Chinese outbound M&A in 9M18, when they together accounted for 37% of total transaction value. However, there has been a shift in recent years away from these traditional targets and towards manufacturing and high technology sectors. TMT, consumer goods and the financial sector had the most deals in 9M18, while consumer goods, TMT and autos were among the top five sectors in terms of transaction value. The overall manufacturing sector represented around half of acquisitions by value in 2017, up from 22% in 2016.
Source: Fitch Ratings

Recent Videos

Hellenic Shipping News Worldwide Online Daily Newspaper on Hellenic and International Shipping