The Chinese economy is undoubtedly undergoing fundamental shifts due to a combination of factors, including slowed economic growth, ongoing political tensions with the West, a large aging population and changing demographics. Since the beginning of 2024, the capital market in China has witnessed several significant shifts in various industries and sectors.

Sluggish IPO market; “public-to-private” buyout deals attracting interest.

• In the first half of 2024, Chinese companies cancelled IPO listing in droves due to heightened scrutiny by regulators. Offshore listings in Hong Kong and the US fared a little better.
• Meanwhile, an increasing number of listed companies, such as Li Ning and China Traditional Chinese Medicine Holdings, are considering leveraging depressed valuations to go private.

The property market crisis continues.

• The Chinese real estate market has been in crisis since 2020, following government measures to tighten leverage in the sector.
• Real estate/property sector deals surged as property developers divest assets to raise money and repay debt and the trend is expected to continue in the foreseeable future.

Healthcare sector sees an “exodus” of MNCs from their traditional Chinese operations, while interest in innovative therapies grows.

• The sector has witnessed a trend of Western multinational corporations (MNCs) divesting out of their low-growth, low-margin, non-core assets in China. This shift comes as the country transforms from a high-growth market to a more mature one, with domestic players becoming increasingly competitive.
• Nonetheless, China remains an attractive market for many MNCs. Re-streamlining existing portfolios, diversifying investments, and focusing on innovative therapies and joint venture collaborations are becoming the new strategic priorities for both incumbent and new players.

Technology and AI investment opportunities continue to attract strong interest despite economic headwinds.

• Technology firms, ranging from AI developers to EV battery makers continue to attract interest from domestic and overseas investors, including sovereign wealth funds, family offices, ultra-high-net-worth individuals, and major trade players. Despite economic challenges and downturns in other sectors, interest in the high-tech sector remains robust.

To address the economic challenges, the Chinese government has introduced numerous regulatory and monetary measures, as well as stimulus, aimed at improving market liquidity and attracting foreign investments.

Some of the measures include:

• Pro-market policies: In 2023 and continuing into 2024, an unprecedented level of monetary, fiscal and regulatory policies have been introduced.
• Support for venture capital: China’s State Council is actively pursuing measures to boost the development of venture capital.
• Boosting liquidity: The People’s Bank of China (PBOC), the country’s central bank, plans to roll out more measures to boost market liquidity.
• Capital injection: The government plans to inject up to USD 142bn of capital into its biggest state banks to enhance their capacity to support the economy.

So what are the implications of the current state of China’s economy and capital market on mid-market M&A?

Here is our perspective on potential deal opportunities over the next 6-12 months.

Robust interest in certain sectors:

We observe significant interests from Chinese companies in acquiring quality international assets in the following areas:

• Consumables: Particularly high-quality skincare products, pet products (including pet pharmaceuticals), specialty apparels with high-tech materials, and premium alcoholic beverages.
• Healthcare: Focused on high-quality supplements from developed regions such as Australia, New Zealand, and Europe.
• Industrials: Especially high-tech manufacturing businesses with proprietary technology or intellectual property.
• Resources: Notably, there is interest in gold mines and resources essential for EV battery production, such as cobalt and lithium.
• “Sunset” sectors: In areas such as textiles (including general apparels), construction, and real estate, where oversupply is significant, there is minimal appetite or capacity for overseas investment. The only rationale for deals would be to acquire foreign markets to help absorb excess capacity, however, the complexities involved make this challenging.

Diverse investor universe:

• We anticipate a continued diversity among investors, ranging from state-owned entities (SOEs), listed and private corporates, to private equity firms and high-net-worth individuals. Notably, current geopolitical tensions between China and the West have introduced nuances in “geography and investor matching”. For instance, few SOEs are considering investing in the US due to political sanctions and regulatory restrictions.

Potential areas for deal generation:

We identify several areas where deal opportunities may arise:

• Outbound investments by Chinese investors: Many Chinese investors are actively seeking quality overseas assets that meet their investment criteria, driven by the economic downturn at home and the expectation of higher returns abroad.
• MNCs divesting out of China: This trend includes divestments in the healthcare sector and beyond, particularly in manufacturing. Clairfield International’s ASEAN partner, Yamada Consulting Group, is actively supporting Japanese MNCs in this space.
• FDI into China: With increased market access, a fair competitive climate and relaxed regulations, China is expected to become a more attractive destination for foreign companies.

(Source: Mergermarket, KraneShares)

China M&A – support for the midmarket

 

Jenny Zeng leads Clairfield’s China Desk. Jenny supports Clairfield partner firms globally with deals involving Chinese businesses, ranging from state-owned entities, and listed corporations to sizeable private businesses and family offices. She collaborates closely with China-based M&A firms and investment banks, acting as a conduit between Clairfield partner firms and Chinese investors. Jenny assists in sourcing, qualifying, and accessing Chinese investors across all industries, providing Clairfield partner firms with comprehensive insights and access into the Chinese M&A market. If you are exploring M&A opportunities with a China angle, we are here to help.