19 March 2019

BDA’s Mark Webster writes in PEI: finding bright spots amid China’s slowdown

Private Equity International

Where PE can find bright spots amid China’s slowdown

BDA Partners’ Mark Webster describes how Xi Jinping’s recent pledge to improve access to Chinese markets and lower import tariffs will affect private equity and M&A markets in Asia.

In November, Chinese president Xi Jinping delivered the keynote speech at the opening ceremony of the very first China International Import Expo in Shanghai. Preparations were extensive: city schools closed, construction projects were suspended and even police officers posted in hotel rooms with sensitive sightlines to monitor guests who had not voluntarily vacated for the day.

Such measures signalled not just Xi’s singular status, but the importance of his message. “Economic globalisation faces headwinds, and multilateralism and the system of free trade are under threat,” he said. Diplomatically, he chose not to illustrate this point by referencing American threats of 25 percent tariffs, or 2018’s 90 percent drop in the value of Chinese outbound M&A transactions into the US.

Xi’s key theme – previewed in Davos in 2017 – was China as the defender of international economic order, leading by example. He emphasised that this was a continuation of a long-established liberalisation process – neither a knee-jerk reaction to external pressures nor a search for stimulus in the face of domestic deceleration.

Global investors can confidently expect China to pursue “a new round of high-level opening-up” and to engage in a “major initiative to still widen market access to the rest of the world”. This means “stimulating the potential for increased imports” and reduced restrictions for foreign investors.


The other side

However welcome it may be, any ongoing economic liberalisation will struggle to fully offset either the slowdown of the domestic economy or the related disruption from continued American pressure. US-China trade relations are liable to be problematic into the medium-term at best. The modest foreign direct investment statistics show that China has already lost ground here, being overtaken by India for the first time in 20 years.

Many businesses are looking to adjust to be less China-dependent. In particular, export-oriented manufacturing will rebalance towards South-East Asia, with Vietnam and Malaysia being two favoured destinations. M&A will be key to that process, involving acquisitions of companies with facilities and skills that can be quickly dedicated to take on activities displaced from China. Regional private equity may have an arbitrage role to play if sufficiently nimble.

Sponsors are thus entering a turbulent 2019, China’s efforts notwithstanding. Trade tensions merely steepen the hill for an economy that was already slowly under debt deleveraging. This year will struggle to be a vintage one for either RMB fundraising or IPO exits.

Yet, in a market of China’s size and secular momentum, bright spots will remain. An aging but wealthier population hungry for better health, education and life experiences will generate opportunities even in the face of a wider slowdown – and the majority of these will have made good investment sense regardless of regulatory easing directed from on high. Sophisticated and patient investors with dry powder in hand will seek out, find and profit from them.

Mark Webster is a managing director based in Shanghai. He joined BDA Partners in in 2005 and has experience at Standard Chartered Bank and JPMorgan. He speaks Mandarin, Chinese and French.


About BDA

BDA Partners is the global investment banking advisor for Asia. We are a premium provider of Asia-related advice to sophisticated clients globally, with over 20 years’ experience advising on cross-border M&A, capital raising, and financial restructuring. We provide global reach with our teams in New York and London, and true regional depth through our seven Asian offices in Mumbai, Singapore, Ho Chi Minh City, Hong Kong, Shanghai, Seoul, and Tokyo. BDA has deep expertise in the Chemicals, Consumer & Retail, Health, Industrials, Services and Technology sectors. We work relentlessly to earn our clients’ trust by delivering insightful advice and outstanding outcomes.

BDA Partners has strategic partnerships with William Blair, a premier global investment banking business, and with DBJ (Development Bank of Japan), a Japanese Government-owned bank with US$150bn of assets.

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