Challenges and Opportunities in China’s Outbound M&A Market

International Financial Law Review (IFLR) published a five-part China Outbound M&A Report that delves into both the challenges and uncertainty faced by Chinese investors looking to expand portfolios and capabilities, as well as optimism towards certain sectors and potential opportunities to transact in Southeast Asia. Legal and professional services leaders around the globe provide their insights into the driving forces impacting Chinese outbound M&A.

Among the various regional industry experts quoted in the reports, MoFo's Shanghai partner Ruomu Li shares her views on challenges and changes facing Chinese outbound M&A and preferred sectors, while MoFo's Berlin partner Dirk Besse discusses why access to Europe may prove more difficult due to strict foreign direct investment (FDI) rules.

Ruomu points to political and economic reasons why China won't see 2015-2017 peak outbound M&A numbers again any time soon. "With increasing geopolitical tensions and conflict, there is a global focus on national security and reviews of foreign investment," states Ruomu. "China is being considered as a high-risk jurisdiction by various countries where good targets are located, such as the U.S. and Europe. Investments from non-sensitive sectors and not within CFIUS [Committee on Foreign Investment in the United States] review are safer, but whether the targets are attractive is another story."

According to part two of IFLR's report, sector-specific clampdowns account for the greatest regulatory challenges in China for outbound M&A transactions. There is optimism, however, towards preferred sectors, such as core technology and life sciences, which could drive greater Chinese outbound M&A as those sectors better align with China's national interests. A focus in the past on investments in areas such as luxury goods proved to be unattractive, and according to Ruomu, "these investors had huge debt ratios and didn't realize any gains or returns, so there is now more caution going into these sectors."

In part three of IFLR's report, Southeast Asia is highlighted as an opportunity on the horizon for Chinese investors due to its attractive demographics, including potential targets in Indonesia, Vietnam, and Singapore. "Interest will be towards countries with less stringent FDI regimes and there isn't a market in Southeast Asia that has a similar regime as CFIUS," states Ruomu.

IFLR's final report [part five] shifts the focus to Europe and provides greater detail into the reasons why Chinese investors may divert their attention away from European targets due to growing FDI regimes. "The decline of Chinese outbound M&A into the U.S. in the last few years has been compensated by an increase into Europe, however, stricter FDI rules in Europe will result in a decline, and I expect the volume to decrease in total," says MoFo's Dirk Besse. "Chinese investors have focused on smaller deals in sectors that are less sensitive areas where restrictions are less. In these deals, they get less public attention and political scrutiny, and it is easier to manage the processes with regulatory authorities."

Dirk also mentions that, "While Eastern Europe would have been more receptive to investments, the region is not currently in a mode where people are focused on investments, and investors will need to see how the dust will settle following the Ukraine war. However, Balkan countries, as well as Greece, remain attractive to Chinese investors, especially when there is no need to protect certain industries, such as specific technologies or their own automotive sector for instance, and [they] are reliant on imports."

To access the full reports, please visit Mergers & Acquisitions | Corporate | International Financial Law Review (iflr.com) (subscription required).