Will Russia experience more of Chinese cross-border M&A?

China Russia M&A
China Russia M&A

The volume of foreign mergers and acquisitions involving Chinese companies is falling. Since the beginning of the year, the amount of such transactions amounted to $113 billion, a third less than in the same period last year. This is primarily due to government policy of China that seeks to limit such transactions and to stop the outflow of capital abroad. Especially greatly decreased is the amount of M&A involving Chinese companies in the US — here the big role is played by protectionist ideas of a President Donald Trump.

It is becoming more difficult for Chinese companies to invest abroad even if they have the funds for such acquisition. First and foremost, a matter of policy, the Chinese authorities are tightening rules for foreign investment and generally seek to suppress them, trying to prevent the withdrawal of capital from the country. Regulatory, political and other reasons lead to the fact that European and Asian companies with big doubts look to transactions involving investors from China.

The Chinese authorities are checking foreign acquisition stricter. In addition, they have developed rules that limit the possibility of buying non-core assets abroad. The authorities restrict real estate transactions, hotels, and entertainment, but continue to support investments in technology companies.

For example, in July it became known that the Chinese authorities want to limit foreign acquisitions of one of the largest developers in the country, the Dalian Wanda Group. They demanded from Chinese banks not to finance such transactions and not to accept foreign assets as collateral for funding.

According to the company Dealogic, since the beginning of this year, Chinese companies announced mergers and acquisitions worth $113 billion, a third less than in the same period last year. Last year was a record in terms of outbound M&A of Chinese companies that have acquired assets abroad by more than $220 billion.

“In a sense, they were the perfect customers, because it seemed they have a long-term approach and an unlimited checkbook,” said the head of the global division at M&A law firm of Paul, Weiss, Rifkind, Wharton & Garrison Scott Barshay.

Especially decreased is volume of Chinese acquisitions in the United States — 86 transactions, $9.9 billion against 118 deals $33 billion last year. Among other things, the US authorities, including the special Committee on foreign investments at the Ministry of Finance of the United States (CFIUS), started to thoroughly check transactions involving Chinese companies. This happens on the background of statements by the US President Donald Trump on the protection of American production and the deterioration of trade relations between the two countries.

Just this week Mr. Trump by his decree blocked the purchase of American chipmaker Lattice Semiconductor by pool of companies including Chinese state corporation “China Venture Capital Fund Corporation Limited”. According to the press service of the White House is the President’s decision is justified by reasons of national security.

Chinese companies are hindered by the fact that because of these limitations they are increasingly forced to refuse already concluded contracts. This, in turn, makes them less reliable customers in the eyes of other companies. Among the deals revoked or suspended because of pressure from the authorities is the purchase by Chinese Shandong Tyan Home shares in the Australian gold fields for $1.3 billion and the purchase by Dalian Wanda Group of production company Dick Clark Productions for $1 billion.

Recently, the Chinese dairy manufacturer Inner Mongolia Yili Industrial Group made an offer to Danone about buying its American manufacturer of yogurt Stonyfield Farm for $900 million. But Danone chose to sell Stonyfield a little cheaper — $875 million to the French company Lactalis. According to The Wall Street Journal, this decision was taken because of the uncertainty associated with Chinese customers.

In connection with the change of attitude in Europe and the United States, Chinese companies are increasingly turning to transactions in other countries, such as Brazil, Israel, India or Russia. Banks also became more cautious with Chinese customers. According to The Wall Street Journal, banks including Goldman Sachs Group, UBS Group AG and Bank of America, began to check carefully the sources of funding before starting work on transactions.

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