Despite the many challenges that may cause volatility in China's outbound M&A trajectory in the coming years, economic fundamentals suggest that China is still only at the beginning of a secular catch-up in global investment. Chinese companies can be expected to spend hundreds of billions of dollars on overseas deals in the coming decade—if short-term speed bumps are overcome.
Our analysis suggests that, if China sustains economic growth and stays on track with external financial liberalization, the average annual value of Chinese outbound M&A will more than double from 2015 to 2025 compared with the period from 2010 to 2015. This growth would enable China to achieve an average annual outbound M&A value of as much as US$190 billion over the next ten years.
Recent figures support the thesis that volatility should be expected along the way. The value of Chinese outbound M&A was down 59 percent to US$125.14 billion in 2017, compared to 2016—although the number of outbound deals declined by only 6 percent to 361 deals. This was a dramatic drop from the record-breaking year of 2016. But 2017 was still the second-highest year for Chinese outbound value in history, up 25 percent from 2015, the year with the third-highest value. Moreover, China ranked second after the US as a global bidder in 2017, both by value and volume.
In large part, the decline was likely due to changes in policy in both China and the United States. In 2017, Chinese authorities implemented rules that require relevant central-level regulators to approve outbound transactions that are more than US$1 billion and that involve purchasing companies focused on areas that are outside of the acquirer's core business; all acquisitions above US$10 billion have to be approved. This requirement certainly affected outbound activity.
And, in addition to the Trump administration's protectionist rhetoric, the Committee on Foreign Investment in the United States (CFIUS) has taken a tougher line on foreign deals since President Trump assumed office. Indeed, a number of large Chinese deals targeting US companies were abandoned in 2017 due to CFIUS scrutiny. The value of Chinese deals into the US plummeted 81 percent to US$10.7 billion year-on-year, and volume dropped by 15 percent.
The 2017 dip does not change our long-term outlook on the future of Chinese M&A. Value will rise and fall, sometimes dramatically, over the course of the next decade, but the overall trajectory is likely to be positive. China will remain a significant player on the global M&A stage.