June 15, 2017

New deal

by Breakingviews

Chinese dealmaking is entering a new phase. After a banner 2016, pressure abroad and at home is curbing outbound deals, and life is getting tough for swashbuckling serial acquirers like Anbang. The slowdown could intensify as China enters a delicate political season. Further out, however, the current pace looks sustainable.

As of June 13, companies from the People’s Republic had announced nearly $60 billion of foreign M&A, Thomson Reuters data shows. Annualised, that equates to about $133 billion, a stark contrast with the $220 billion of takeovers unveiled in 2016, most notably ChemChina’s $44 billion purchase of Syngenta.The pullback is unsurprising. Late last year, as the yuan fell against the dollar, Beijing started looking harder at overseas deals, especially large or leftfield ones, and those that could be capital flight in disguise. The flood of M&A also sparked political blowback in countries such as America, Australia, and Germany.

The domestic pressure is unlikely to ease as ahead of this autumn’s crucial party congress, where President Xi Jinping will seek to consolidate power. Political factions are jockeying for power. Officials will be extra wary of approving bold corporate moves, or ones that could draw unwelcome attention overseas.

Pressure is already building on some of the biggest dealmakers. On Tuesday, Anbang Insurance said Chairman Wu Xiaohui was temporarily unable to fulfil his duties, and reports said he had been detained. HNA, another eager buyer, recently said it will ease off. And Dalian Wanda, the property group run by China’s richest man, saw a flagship U.S. takeover fall apart in March.

Yet aside from the headline-grabbing megadeals, Chinese companies remain hungry for international brands, knowhow, and broader reach. Unless the authorities really pull up the drawbridge, the purchases should keep coming.

Over the last ten years, outbound M&A from America and Japan has fluctuated, but averaged about 1.2 percent of GDP. Suppose China invests at a similar rate. A back-of-the-envelope calculation suggests it could log slightly more than $150 billion of deals in 2018. That would fall short of 2016’s exuberance – but still keep plenty of M&A bankers busy.

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