To the casual observer, the economic outlook in the Asia Pacific region, and China in particular, has been rosy for a long time, with international attention focused on fast-paced economic growth and emerging wealth in the region. However, the beginning of 2016 has proven to be difficult for Chinese government officials as they contend with tumultuous stock markets and newly released 2015 economic figures. As far as the outlook on M&A is concerned, Chinese companies’ overseas mergers and acquisitions were strong in 2015 and are expected to continue growing while spending on foreign M&A into China was down significantly in 2015.
In the first week of 2016, trading on the Shanghai and Shenzhen Stock Exchanges was abruptly stopped after the CSI 300 Index fell by 7%, triggering a newly imposed circuit-breaker mechanism. The effects of the stoppage were felt in markets around the world, adding to the rising uncertainty about the Chinese government’s ability to steer its economy through its growing pains.
Newly released figures show that China’s GDP grew by 6.9% and 6.8% per quarter in the last two quarters of 2015. While this is consistent with the government’s target of 7%, it is the first time we have seen growth fall below 7% since 2009. Continued focus on China’s slowing GDP growth, however, may be misplaced according to a recent report by MergerMarket. While the government has attempted to reign in unbridled growth, the Chinese economy continues to be highly leveraged. China’s total debt has increased more than fourfold over the last 7 years and today, its corporate debt represents nearly 125% of GDP, all of which has led to speculation of a potential credit bubble.
According to a recent article in the Financial Times, the slowdown in economic growth has been most visible in China’s lagging real estate and commodities markets, while the services sector (including healthcare, education, law, accounting and financial services) has been a driver of the growth we have been able to see.
Last year, Chinese companies increased their spending on overseas mergers and acquisitions by 85.8% over the previous year, representing an estimated $110.3 billion in 2015. During the same period, deals coming into China dropped by a third from the previous year, amounting to an estimated $10 billion. Commentators anticipate that outward M&A spending will continue to grow in the future as Chinese companies look for opportunities outside of China to invest their capital and seek out technology and innovation. Europe was the top region for Chinese foreign M&A in 2015, with significant focus being drawn to the energy, mining and utilities sectors.
The Chinese government will be releasing its new five year plan in March of this year which should shed insight on what economic policies the government intends to put in place to manage its growth and strategically position the economy in the coming years.
The author would like to thank Kaitlin Shung, articling student, for her assistance in preparing this legal update.
Stay informed on M&A developments and subscribe to our blog today.