Regulatory, geopolitical uncertainties cloud M&A activity in China: Deloitte

“Uncertainty is a big word, and [it] has been affecting confidence,” said Stanley Lah, strategy and transactions national leader at Deloitte China. “The main factor is investors are just not sure about the economy, confidence is not high and they want to see the steps [China’s] government will take to drive economic growth.”

China’s slowing economy is proving to be a drag on consumer sentiment and business confidence. The economy continued to be weighed down last month by a persistent property slump, weak consumption and elevated unemployment.

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China posts 4.7% second-quarter growth, lower than expected

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The slowdown has been reflected in deal-making. In the first half of 2024, M&A volumes and values in Asia-Pacific decreased by 17 per cent and 32 per cent, respectively, compared with the first half of 2023. Deal volumes in China declined by 19 per cent.

“People are more cautious in making long-term decisions and investments, which is why deal volume and activity are much lower,” said Lah.

Deloitte, which surveyed 42 Chinese companies across different industries, ownership types and sizes in M&A, found that nearly two-thirds of respondents highlighted domestic economic and regulatory uncertainties as the principal challenges for executing deals. More than 75 per cent of respondents said international political and economic uncertainty had affected their ability to execute deals successfully.

The survey also found that fluctuating interest rates and less predictable economic policies could deter investment decisions.

Despite the uncertainty, more than two-thirds of the respondents were moderately confident in China’s economic recovery and prospects, while nearly 80 per cent said the current economic situation favoured M&A activity.

Looking ahead to the next 12 months, most of those surveyed expect an increase in M&A, with half predicting the number of deals by their organisations will increase and 38 per cent expecting it to stabilise.

For corporations that are determined to stay in the game, risk mitigation is becoming more important than ever in times of turbulence, according to Deloitte. As China’s domestic market slows and home-grown companies become more competitive globally, many Chinese companies are actively pursuing globalisation.

The strategic rationale for Chinese enterprises to go global has expanded from seeking markets, technologies, brands and natural resources to supply-chain integration and international operations.

“If you look at the globalisation of Chinese companies, definitely more companies are going outbound and that trend is going to continue,” said Lah.