Chinese overseas M&A deals are down this year, and will only fall further

China's Transition
China's Transition

A graveyard of failed deals coming from China looks set to grow more crowded this year.

Chinese outbound M&A has taken a slight dive during the first half of 2017, as Beijing imposes capital controls introduced last December that make it difficult to move money out of the country. While signs of a resurgence emerged in May and June, recent government actions—including calling businesses hungry for overseas deals a “systemic risk” (paywall)—suggest the deal volume will resume slowing in the year’s second half.

Data from research firm Rhodium Group shows that Chinese companies announced 92 outbound M&A deals between January and June. That’s down from 113 in the same period in 2016, marking an 18.6% decrease.

Meanwhile, the size of each deal has shrunk slightly as well. Rhodium notes that throughout 2016, there was on average one deal per month amounting to over $3 billion. But only two such deals have surfaced in 2017: State Grid’s acquisition of Brazil’s CPFL Energia, which valued the electric company at about $4 billion, and China Investment Corporation’s purchase of UK warehouse firm Logicor, which cost $13.8 billion.

Who’s getting money out amid the crunch? Mostly the government, it seems.

In 2016, most of the largest deals were carried out by private-sector companies. But since the crackdown started, 60% of deal value has gone to state-owned enterprises or sovereign wealth funds like China Investment Corporation.

Governments, economists, and businesses worldwide are watching China’s outbound deal volume. As state-affiliated and private Chinese companies plow money into overseas targets, critics have voiced concern that Beijing will use newly acquired assets for its own political gain. Two deals are under particular scrutiny now (paywall) in the US. Regulators worry the purchase of remittance firm MoneyGram by Ant Financial, the electronic payments affiliate of the Alibaba Group, could compromise personal data. And defense hawks fear a China-backed fund’s attempted acquisition of Lattice Semiconductor might enhance China’s military.

Meanwhile the pace of overseas acquisitions in recent years suggests that Chinese businesses believe China’s economy is unstable, as they seek to put capital elsewhere. And many of their purchases are funded by debt, worrying Beijing.

A surge in cross-border deals throughout 2016 amounted to $140 billion (pdf), causing Beijing in December to release the new rules making it difficult for large companies to complete such acquisitions. Since then, several high-profile deals have fallen through, including two involving California companies: Real estate developer Wanda Group attempted to buy Dick Clark Entertainment, and hardware maker LeEco’s tried to buy TV seller Vizio (paywall). And Wu Xiaohui, chairman of the deal-hungry insurer Anbang, was detained by Chinese authorities in Hong Kong a few weeks ago.

Meanwhile, last week, China’s Central Banking Regulatory Commission stated it would launch an inquiry into banks providing loans to some of the country’s most voracious dealmakers—suggesting that the debt fueling some of the deals might get cut off.

That could cause more plunges in the number of deals during the year’s second half.

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