The Chinese government’s recent crackdown on outbound acquisitions may appear wrong-headed. Chinese government officials, who have long touted the country’s “going out” policy, are now complaining that executives are going out far too much.
But although China’s crackdown is hardly the stuff that free marketeers dream about, that doesn’t mean it’s not sensible. China is a country that has now accumulated plenty of experience in deflating bubbles before they pop. That is just what it appears to be doing with acquisitions.
Chinese companies have been on an unprecedented buying spree this year, announcing an eye-popping $218.6 billion of deals, according to Dealogic. That is more than double the amount they announced in 2015. It is not far off the total for the previous three years combined.
Some of these deals have been big, and sensible. ChemChina’s $43 billion bid for Syngenta was designed to give it global reach. Tencent and Midea both impressed bankers by turning offshore for technology. Shanghai Electric furthered the government’s ‘One Belt, One Road’ strategy when it bought an electricity company in Pakistan.
But these transactions have been supplemented by some acquisitions that have appeared to make little strategic sense. Bankers admit in private that many acquisitions have been motivated by little more than a desire to move money overseas.
In this context, the Chinese government has reacted as it knows best — with a firm hand.
Chinese regulators have criticised ‘irrational’ acquisitions outside of non-core businesses. They are refusing to approve ‘non-core’ acquisitions worth more than $1 billion, at least until September 2017. They have prohibited state-owned enterprises from investing more than $1 billion in offshore real estate. They have tightened reporting requirements for banks, making it harder for China’s companies and high net worth individuals to move money overseas.
In other words, Chinese government officials are putting the breaks on. But why shouldn’t they?
An obvious problem facing China at the moment is the depreciation of the renminbi, a trend that has only picked up pace since Donald Trump was elected. The huge outflows from the country this year may have been partly motivated by the currency deprecation, but they have also exacerbated it.
The outflows have caused a further problem, tightening domestic liquidity at a time when the government — wary of fuelling property price inflation — is reluctant to ease monetary conditions.
Of course, one could argue that China’s attempt to cool down the property market would be helped by these outflows. But that relies on the assumption that the government is happy for the decision to be out of its control. Despite all the premature talk of gradual capital account easing for the last five years, the Communist Party is not ready to fully concede control to the market.
Then there is the strategic issue. China’s attempt to make its ‘belt and road’ policy work, and impress, would be weakened by an indiscriminate spree of buying. The important deals, in infrastructure for instance, would get lost in the noise. The ‘One Belt, One Road’ policy is not just about investing in emerging markets — it is about being seen to invest in emerging markets.
Finally, China’s government may have calculated that amid rising questions about regulatory approvals for foreign acquisitions, it makes sense to limit the number of ‘non-core’ deals. That should give a better chance for the big deals, those that the government cares about, to actually get approved.
China’s crackdown on M&A is not welcome news for deal bankers, and will certainly have been greeted with chagrin by mainland tycoons hoping to move their money offshore. But although this column may be called The Reformist, it was created to urge sensible reforms. China’s latest move appears just that.
