What crackdown? Expect more China deals, bankers say

China will remain a major source of deals as local firms invest overseas and foreign companies put money into the world's second-largest economy. PHOTO: ST FILE

SINGAPORE (REUTERS) - China will remain a major source of deals as local firms invest overseas and foreign companies put money into the world's second-largest economy, despite a government crackdown on splashy acquisitions, bankers and investors said.

While new rules to curb irrational spending and outflows have dragged down overseas investments by China's acquisitive companies this year, versus blockbuster 2016 levels, deals are still being made and 2017 promises to be a year on par with 2015, the sources said over a two-day gathering in Singapore.

But the road is not without hurdles as some countries are raising barriers for Chinese buyers. The United States has become more aggressive in limiting investment in key sectors, with President Donald Trump this week blocking a Chinese-backed private equity firm from buying chipmaker Lattice Semiconductor Corp.

Partly due to this and Beijing's curbs, China's outbound M&A volumes nearly halved in the first six months of 2017, according to Thomson Reuters data. The deals that have come under pressure are in sectors like films, entertainment and sports.

However, the "desire for Chinese companies to go out has stayed intact", said Wei Sun Christianson, China chief executive and Asia Pacific co-chief executive for Morgan Stanley. "There are a lot of very credible buyers. Certainly, there is higher execution risk, but deals do get approved."

Sellers are demanding more guarantees, but many also see Chinese companies as long-term partners who can help promote a global presence, especially in Asia, a major area for investment, several industry participants said.

Among Chinese buyers, the most active are those that get Beijing's blessing by investing in sectors the government is focusing on such as technology and green energy. "If Chinese buyers are clever, have the blessing of government, and focus on non-sensitive sectors - there are good assets out there," Mr Christianson said.

Jing Ulrich, vice chairman of Asia Pacific at JP Morgan Chase, agreed that "the desire of Chinese companies ... to expand overseas continues".

There will be deals from companies pursuing projects associated with Beijing's Belt and Road initiative to build a modern day "Silk Road", Mr Ulrich said.

Earlier this year, ChemChina bought pesticides and seeds group Syngenta, which was advised by JP Morgan, in what is China's largest ever outbound deal.

The purchase was prompted by Beijing's desire to use the Swiss firm's portfolio of top-tier chemicals and patent-protected seeds to improve domestic agricultural output.

More inbound deals are also expected as China welcomes foreign direct investment, investors and bankers said. Any move to ease curbs on majority ownership in many sectors, including financial services, will spur more such deals, they added.

The 19th Party Congress this autumn could mark an inflection point for deals involving state-run companies, the sources said.

Specific changes could involve broadening the scope of reform of state owned enterprises (SOEs), moving beyond just consolidation and into spin-offs of non-core assets and the restructuring of subsidiaries with undervalued assets. "So far, we have not seen much movement in SOE reform," said Weijian Shan, chairman and CEO of private equity firm PAG Group. "What we see of interest is the private sector, which is much more scaleable. Ten years ago, it was hard to put in US$100 million (S$134 million) - today you can easily put in several billion."

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