Measures to curb overseas M&As are overdue

Source:Global Times Published: 2017/6/25 19:18:40

Illustration: Peter C. Espina/GT

China's aggressive overseas mergers and acquisitions (M&As) will very likely slow down significantly in the near future.

Chinese companies were a major force in global cross-border M&As in 2016. According to statistics from Thomson Reuters, China's cross-border M&A transactions totaled $221 billion in 2016, more than double the figure of $109 billion seen in 2015, marking a historic high and accounting for about 6.14 percent of global M&As in terms of value. In particular, the value of Chinese M&As in the US surged 841 percent from the previous year.

There are many reasons contributing to the surge in overseas M&As by Chinese companies, such as rising labor costs, the heavy tax burden, high deleveraging pressure and excess savings in the domestic market. But it is mainly the capital surplus brought by the country's rapid urbanization that has propelled Chinese companies to make so many cross-border M&As.

HNA Group, Fosun International and Anbang Insurance used to spend a lot of time looking for potential acquisition targets around the world, and became three of the most active Chinese buyers in overseas M&As. However, they may now have to slow their M&A pace. According to media reports, with Chinese regulators tightening controls over capital outflows, deals worth $5 million or more will require approval from the State Administration of Foreign Exchange. While large strategic acquisitions are likely to get the green light, acquisitions of non-core assets like properties may not get passed. Moreover, although the Chinese yuan's depreciation motivates companies to seek asset diversification overseas, it also makes deals more expensive.

Another important reason for an M&A slowdown is that the Chinese government is quite concerned that the aggressive, sometimes highly leveraged M&A deals may trigger financial risks. Take a close look at Chinese companies' overseas M&As, and there are a few noteworthy features that stand out.

First, overseas M&As are usually accompanied with the cross-border transfer of financial resources. Some companies directly or indirectly make use of special power or policy to add to heir credit line, increasing the likelihood of success for their merger deals overseas. Second, some Chinese companies apply for collateralized loans after acquiring overseas assets so as to avoid the trouble of withdrawing capital from their home country. Third, expanding overseas assets also allow Chinese companies to borrow more and get more credit support both from home and abroad. Fourth, in some M&A cases, overseas firms are just cover and platforms for asset operations, which serve as collateral for financing. Their actual business performance in terms of revenue and profits as well as financial security is not the top priority.

It should be noted that over the past few years, some Chinese companies made overseas M&As based on "scale expansion and high debt ratio," and they expanded their overseas assets so much they became "too big to fail" so as to signal their economic importance. However, such acquisitions backed by capital and rapid expansion may encounter various problems and risks. For instance, changes in financial regulatory policies, tightening of foreign exchange control measures and a clampdown on financial corruption may all affect M&As due to financing problems or policy constraints. Fundamentally, when the extraordinary speed of expansion runs contrary to common sense and lacks basic business foundations, problems are bound to ensue.

Above all, under the current circumstances of domestic financial supervision, highly leveraged cross-border M&As by Chinese companies will be curbed, probably resulting in a notable shrinkage in such transactions this year.

The article was compiled based on a report by Beijing-based private strategic think tank Anbound. bizopinion@globaltimes.com.cn



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