The number of overseas M&As by Chinese firms, which began to skyrocket last year, is expected to hit a new high this year with the slowdown of the Chinese economy reducing the number of business opportunities in China. Last year, China recorded a GDP growth rate of 6.9%, the lowest in 25 years. According to the Asian Development Bank (ADB), the rate is estimated at 6.5% for this year and 6.3% for next year.
Another reason is the value of the yuan that is continuing to drop. The Chinese government has devalued the yuan by about 4% since August last year. Under the circumstances, Chinese enterprises are purchasing more and more foreign assets in expectation of a positive future cash flow.
The Chinese government is encouraging them to buy foreign firms as well with regard to the One Belt One Road project. In addition, the State Council of China announced in May last year that it was seeking to have 40% of the key manufacturing components used by China replaced with domestically produced ones by 2020 and raise the ratio to at least 70% by 2025. Furthermore, an increasing number of Chinese companies are trying to take the lead in the domestic consumer market by buying famous foreign brands. Last year, private companies accounted for 76.8% of overseas M&As by Chinese firms.
State-run banks in China are willing to finance the activities, too. The Bank of China recently announced that Chinese firms borrowed a total of US$38 billion for overseas M&A purposes last year and the total amounted to US$56.3 billion for the past six years. The bank added that it would provide a loan of US$100 billion between 2015 and 2017 with regard to the One Belt One Road project.
Not all of the M&As have been successful though. Anbang Insurance, for example, gave up on Starwood Hotels & Resorts in the middle of the bidding last month. The Fosun Group, one of the largest private investment companies in China, dropped its plan for acquiring Israeli insurer Phoenix Holdings in February this year. In that same month, the Hualian Group withdrew from the bidding for Fairchild Semiconductor. The first case was for the China Insurance Regulatory Commission’s opposition based on its regulation that 15% or more of the total asset of a Chinese insurer cannot be invested abroad. The third one was because of the Committee on Foreign Investment in the United States (CFIUS), which had also been opposed to Tsinghua Unigroup’s acquisition of Micron Technology for national security reasons.
The unstable financial and governance structures of Chinese enterprises are affecting foreign investors’ sentiments, too. The Financial Times recently reported that the Anbang Group has yet to disclose its exact financial and governance structures, adding that M&A deals between Chinese companies and those in advanced economies are unlikely regardless of price unless the prerequisite is met.