Cautiously optimistic on cross-border M&A uptick in China

The year of the Wood Snake, promises introspection, wisdom and growth.  These are all in much demand as geopolitical tensions mount, a new president has entered the White House, and several major economies appear to be stagnating.

Growth in M&A activity will depend in part on the new US administration and China’s response to its trade policy.  How China addresses the need to encourage increased consumption at home will also have a significant bearing on confidence.

As far as inbound M&A is concerned, we expect the market to remain relatively muted. Having said that, we are seeing multinational investors continuing to invest in China for China, given the importance of the market.  Increasingly, many foreign firms are drawing on China’s extensive and deep engineering talent pool to fuel product development for both the Chinese and overseas markets. Foreign investment policy has evolved to make it easier for foreign companies to invest in A-share listed companies. For example, new policies allow general offers and share exchanges. We expect to see selective restructuring whereby investors seek to realize profits and optimize their China operations.

Outbound M&A activity remains driven by strategic considerations – access to critical natural resources, for example – and increasing export barriers across certain sectors in the US and EU. Examples of the latter include the EV and solar industries, in which we see Chinese players being driven to build local manufacturing facilities. To this end, they will often be looking for joint venture partners, which are able to contribute capital and manage government relations – echoing how foreign investors entered China 20-30 years ago.  

In terms of industry themes, we are seeing Chinese exporters, including home appliance giants, seeking growth in overseas markets by acquiring local brands, channels and even manufacturing facilities. One sectoral theme to bear in mind is the continued upheaval in the auto industry as it transitions from the internal combustion engine to electric vehicles.  This will have knock-on effects in terms of both inbound and outbound M&A.  We should expect more transactions along the lines of the Stellantis-Leapmotor transaction, which concluded in 2023, whereby a foreign investor enhances its access to the China market and specific supply chains or technology, while offering a Chinese counterpart EU market access, as well as some technology too, perhaps.

Healthcare remains active for mixed reasons. All participants in China’s pharmaceutical market are facing increased pricing pressure from a central government eager to curb spending via its volume-based procurement system. This is leading to the disposal of selected China operations by some foreign investors, on the one hand, and a scramble to bolster sales by domestic players on the other.  On a more encouraging note, however, multinational pharma groups seeking to bolster their pipelines are on the lookout for molecules developed in China by local biotech firms. The trend of licensing these products for commercial roll out in the US and Europe is likely to continue.

Although we might be hopeful as far as policy makers’ introspection and wisdom goes, we can be cautiously optimistic about an uptick in China cross-border M&A versus 2023.