M&As in manufacturing sector remain active; private firms set to secure more deals: Chinese mainland enterprises wrapped up 572 overseas mergers and acquisitions (M&As) in the first three quarters of 2017, worth a combined value of US$97.7 billion.
The total number of deals and value so far this year almost match the annual figures for 2014 and 2015 combined, but are down 14.8% and 38.9% respectively from the first three quarters of 2016. Compared with the skyrocketing development seen last year, the pace of growth over the first three quarters of 2017 followed a more rational path.
Andrew Li, PwC China Deals Domestic Leader, said, “Over the past year, Chinese domestic regulatory authorities provided a range of influential policy guidance and unveiled regulations, while companies also faced overseas regulatory reviews and uncertainties impacting the global economy. As a consequence, overseas M&As declined from the scale seen in 2016. However, cross-border M&As with strategic significance were encouraged by the government and welcomed by the market, and so remained stable over the period.”
Chinese privately-owned enterprises (POEs) continued to be especially active, clinching 359 M&As in the three-quarters, equating to 63% of the total number of deals. The proportion is nearly five times that posted by state-owned enterprises (SOEs) which is similar to the prior year. Concurrently, the number of overseas M&As dominated by financial investors continued to rise, reaching 135 in the first three quarters of 2017, and accounting for a record high 24% of the total. The trend indicates the increasingly active role financial investors are playing in overseas M&As.
Spurred by a need for industrial upgrading with organic growth, Chinese listed companies were again the major players when it came to securing overseas M&As. In the first three quarters of 2017, the number of overseas M&As clinched by Chinese listed companies exceeded 58% of the global total. Further, as overseas-listed companies have competitive advantages over mainland-listed companies in foreign-exchange financing, the amount of overseas M&As posted by overseas-listed enterprises accounted for 39% of the total, increasing from the ratio of 25% that was registered over the same period last year.
In terms of industries, large-sized M&As were concentrated in energy, electricity and logistics. Further, as the concept of Industry 4.0, began to gain traction, both the number and value of deals involving advanced manufacturing increased. In the first three quarters, overseas M&As in the industrial sector became targets for both SOEs and POEs. Additionally, on 20 November, the Ministry of Industry and Information Technology issued the Notice to Distribute the Guiding Opinions on Playing the Role of Non-governmental Investment in Promoting the Strategy of Leveraging Manufacturing to Develop a Powerful Nation by 16 Ministries, in a bid to encourage private manufacturing companies to boost their capabilities for innovation.
Also of note in 2017, the internal and external taxation environment underwent substantive updates. In terms of policies, the State Administration of Taxation issued the Taxation Guidance on ‘Going-Out’ in October, covering 90 items with regard to tax policies, tax treaties, regulatory requirements and services that enterprises are likely to encounter as they “go out.” Subsequently, in November, the National Development and Reform Commission promulgated the Administrative Measures for Corporate Overseas Investments (Draft). Key changes include starting to supervise domestic enterprises and individuals who use overseas enterprises under their control to conduct overseas investment, as well as abolishing the requirement for investors to file preliminary reports on deal information to the NDRC before submitting formal applications.
Jenny Chong, PwC Asia Pacific International Tax Services Leader, said, “As regulations and policies affecting overseas M&As are gradually clarified and refined, they will provide guidance and assistance to enterprises navigating the laws and rules as they ‘go out.’ They will contribute to China’s opening-up and international economic cooperation, help companies avoid tax risks with overseas investments, and enhance these taxpayers to compete globally. As a result, Chinese enterprises will be supported as they step up efforts to go global, increase in size, as well as improve quality and efficiency of their overseas investments.”
Andrew Li concluded, “For China’s overseas M&As, 2017 is proving to be a period of adjustment. Looking ahead, as the reform of the supply side deepens, in light of China’s industrial upgrading and the guidance related to the ‘Belt and Road’ initiative, overseas M&As should stay active as enterprises mull making strategic developments. Cross-border M&As by Chinese enterprises will become more steady and orderly in 2018, on course for a bright outlook by 2020.”
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