Private Equity International
By Carmela Mendoza

Outbound deal activity by Chinese investors has fallen 50 percent in the last 12 months amid continuing regulatory constraints on Chinese cross-border investments and the fallout from the US-China trade war. The total value of Chinese outbound M&A into North America stood at $4.7 billion from January until 23 July 2018, compared with $9.4 billion in H1 2017, according to Asia-focused investment banking advisor BDA Partners. The firm said in the report the volume of investments has been undoubtedly affected by the economic and financial tensions between China and the US.

The second half of the year looks even more challenging for Chinese capital with overseas investing ambitions. The Foreign Investment Risk Review Modernisation Act is expected to become law in the next few months. FIRRMA seeks to widen CFIUS’s remit over transactions, especially in deals that involve critical technology, critical infrastructure, as well as start-ups and breakthrough technologies.

Andrew Huntley, senior managing director at BDA Partners, warned that as the trade dispute continues, restrictions on acquisitions by foreign firms in China could be used as an instrument in the escalating dispute and create more decline.

“This route could appeal as China ‘runs out of road’ in terms of direct tariff measures. While foreign investment regulations are well established in China, there is in practice – as in many countries – considerable latitude to slow or block inward acquisitions without explicit policy change.”

The drop in Chinese outbound investments has been the most significant in North America, but overall deal values across Asia and the rest of the world have also slumped from H1 2017 compared with 2018 to 23 July. Asia dropped 13.4 percent and the rest of the world, 47.8 percent. Europe however has seen a 38.8 percent increase in share, according to the BDA report.

“H1 2018 outbound deal value is down on 2017, which reflects ongoing challenges for Chinese players remitting capital out of China, combined with headwinds caused by careful regulatory scrutiny in many Western countries, notable in the US via the Committee on Foreign Investment Review in the US mechanism,” Andrew Huntley said.

Computer and electronics, healthcare and professional services saw the highest number of deals closed in the first half of 2018, 253 transactions of the 550 total.

Meanwhile, Asia-Pacific cross-border deals by Chinese investors increased in markets like Australia, Malaysia, New Zealand and Thailand.

“The US-China trade tensions will naturally divert a lot of the deal-making attention to Europe and Asia. We are seeing Chinese private equity buyers opening up to the regional markets, focusing more on Vietnam and Indonesia,” Spencer Park, a Hong Kong-based counsel at Dechert, told Private Equity International.

Eric Deltour, a partner at Dechert, also noted that deal activity into Europe from Chinese private equity buyers remains buoyant and robust. “Given that China is the second largest economy in the world and has a very strong industrial base, buyers are seeing a lot of complementarities with the European landscape where there are a lot of industrial assets. The automotive industry, renewable energy, healthcare and telecommunications are the favoured sectors,” he said.