- China is loosening its investment regulations while many other countries are doing the opposite.
- In India’s case, they are showing a selective tightening of M&A rules.
- On the global M&A market, politics often come into play when defining the rules of the investment game.
Eastern countries are on the rise in the M&A market, however, this trend may have been obscured by the current global health situation as well as geopolitical tensions. During one of the panels of the China Cross-Border M&A and Private Equity Investment Forum that took place in August, business experts discussed how tightening regulations and redirected capital flows may impact the M&A situation in the Asia-Pacific region.
China is welcoming investment but facing trouble investing abroad
‘Overseas investment is still very welcome here. The regulation of inbound investments in China is not as strict as it is in many other countries’, says Chen Bing, Partner at King & Wood Mallesons. He says, Beijing has been taking down many of its previous regulations and loosening the existing ones.
Meanwhile, business sensitivity to politics is increasing in China and also in some other countries. For instance, with the escalation of Sino-American tensions, Canberra has started to treat Chinese capital more rigorously. As the University of Sydney calculated, Chinese investment in Australia fell 58 percent YoY in 2019. The numbers may go down further, researchers suggest, as Australia mirrors the tighter FDI screening policies of several western countries, including the USA, Canada, and members of the EU.
In turn, China has not become stricter than it was before, Chen points out. Moreover, Beijing, as well as several local governments, is considering possible new incentives to boost inbound investment. ‘Despite negative comments about China in Australia, or the troubles met by Huawei in Canada, China is welcoming investments from these countries,’ says Chen Bing.
In terms of outbound M&A activity, he adds, globally China is facing challenges. For instance, he mentions the tightened rules for Chinese capital in the US, namely the changes to the CFIUS rules. The scope of the CFIUS review, Chen believes, is too broad. The new regulations on the Australian and the EU markets are also making it harder for Chinese businesses to invest there.
India: tensions with neighbors and a booming IT industry
Recently, lots of Chinese companies started investing in India, considering the country a strategic location. Despite this trend, Chen points out, the Indian government is also tightening M&A regulations for the countries it shares a border with. According to data gathered by Bloomberg, companies from China planned to invest about $579 mln in Indian companies in the 1H2020, down from $1.5 bn for the same period in 2019.
The situation between the countries gets more complicated due to the tensions on the disputed China-India border. Nevertheless, the panelists suggest a further slowdown in Chinese investment in India this year. Some of the investors prefer a ‘wait and watch’ strategy, especially in terms of the Covid-disrupted global economy.
Despite strained relations with its neighbors, India is actively attracting global investments, the leading sectors being IT and Telecommunications. For instance, this spring, Facebook invested $5.7 bn for a 9.99% stake in Jio Platforms, the digital technology branch of the Indian digital services conglomerate, Reliance Industries.
Geopolitics coming into play
‘Earlier, M&As and investment were easier to deal with,’ admits Josh Shin, Partner at Fangda Partners. Today, he adds, regulations and deal proceeding are heavily impacted by geopolitical issues as governments all over the world introduce new tools to tighten control over M&A activities.
The experts at the forum recommend investors pay extra attention to the following:
- Antitrust regulations.
These rules are already being used quite frequently to uphold national security, says Shin. In his opinion, we’ll see such regulations being applied even wider in the future.
- Availability of free trade zones.
‘We can hardly imagine the future without the free flow of capital’, stresses Chen. As an example of a perspective model, he mentions Shanghai’s pilot ‘free trade zone’.
- Specifics of the industry to invest in.
One can expect further tightening of regulations for the industries which are actively developing technological know-how, especially the ones connected to public health and medicine. Companies conducting research in the human genome field are typically heavily protected by government regulations, says Shin.
What about the future? China will create more investment-friendly policies and facilitate M&A transactions, the panelists think. “A bigger uncertainty is on the other side of the ocean. The US-listed Chinese companies will sooner or later quit, moving to either China or Hong Kong. This will be a great opportunity for M&A deals,’ predicts Josh.