A volatile stock market and weakening currency has put a damper on all things China but at least one order of business should continue unabated: the nation's hunger for overseas assets.
In line with global activity, which was fueled by near-zero interest rates, Chinese outbound acquisitions reached a record $93 billion last year, 61 percent higher than 2014, according to data compiled by Bloomberg. Among 2015's biggest deals were China Cinda Asset Management's (pending) $8.8 billion purchase of Hong Kong lender Nanyang Commercial Bank and the ChemChina-led acquisition of tire maker Pirelli. A fresh high could be set this year if ChemChina's $44 billion offer for Swiss pesticide maker Syngenta, which would be the biggest-ever purchase by a Chinese company, gains steam.
China's roller coaster stock market and sell-off in the yuan would, it if happened elsewhere, have probably put a lid on deals. In the U.S, the rising dollar has accompanied a deal-making boom, with buoyant equities adding to CEO and board confidence transactions will get done.
Here are a few reasons why China's different:
Shares have never been currency for offshore deals: While certain cross-border deals feature U.S. and European lenders, companies in China typically get their funding from bank loans, and the ones that can't, resort to shadow lenders. The pending take private of Qihoo 360 Technology, owner of China's second-biggest search engine, by an investor group including its chief executive carries a hefty $9.3 billion price tag. That's being funded to the tune of $3.4 billion by China Merchants Bank and two other mainland players, with the rest coming from the consortium and cash reserves.
On top of that, companies listed on the Shanghai Stock Exchange Composite Index, which is down 9 percent this year already, rarely use their stock for overseas acquisitions. Because the so-called A-share market is largely inaccessible to foreigners, share swaps are nearly impossible, and selling equity to raise money for deals is difficult. Plus any listed company in China seeking to sell new shares to fund an overseas purchase needs to announce their exact intentions, and such announcements generally drive up a target's share price.
While it's true that Chinese companies with a Hong Kong, or H-share, listing sometimes use those units (which, effectively, are denominated in U.S. dollars because of the city's currency peg to the greenback) to fund overseas acquisitions, the A-share universe is much bigger. A-shares make up about 77 percent of the total stock market value of Chinese companies versus Hong Kong-listed stocks 18 percent, Citigroup estimates.
Currency fluctuations don't dramatically impact M&A: Even though the yuan has weakened 1.4 percent since Dec. 31, that doesn't seem to worry M&A bankers, who point to Japan as one example. While Abenomics has put a kibosh on gains in the yen, Japanese outbound acquisitions were the second-highest on record last year. A falling currency could actually incite an increase in overseas buying as companies try to secure assets or competitors whose values are stable. And like Japan, which is saddled with an aging population and so must look beyond its borders for growth, China too needs to cast its gaze offshore as domestic growth slows.
Capital flows: The yuan's drop has sparked a flood of capital out of China, with $367 billion in outflows in the most recent three months of figures available. Any continued exodus will prompt non state-owned companies to search for more stable assets overseas, bankers say. While the bulk of those funds exiting are from individuals with domestic savings and companies looking to park cash offshore, buying an asset overseas is also an effective way of moving money out.
Beijing's push to devalue the yuan, combined with the nation's stunning equity rout, may have put money managers in a state of paralysis when it comes to investing in the country. But for mainland companies, that's no reason to hit the outbound M&A brakes.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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