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The US vs. China: how their geopolitical game is affecting M&As

  • The USA are preserving their dominant position, though the competition is growing.
  • The confrontation between China and the USA is deeply rooted, it comes about because of their different ideological outlooks rather than personalities or current affairs.
  • Beijing remains very cautious in terms of restrictive measures against the US in response, while at the same time loosening its regulations to welcome foreign capital.

The global financial crisis of 2008 gave birth to a new M&A ‘superpower’, namely Chinese investors. Having avoided the aftershocks that severely hit developed Western economies, ‘no-name’ companies from China started pouring billions of dollars into acquisitions in the US and the EU. Powered by cheap and accessible capital at home, Chinese businesses gained control over companies in various industries, even the least expected ones like Hollywood studios, luxury hotels, or football teams. 

This cross-border spending spree significantly slowed down after 2016, as the ruling party decided that big sums invested overseas may erode China’s domestic economy. The pandemic-caused crisis of 2020 has revived the old fears that deep Chinese pockets will return and use this opportunity to grab distressed businesses in the West.

For now, however, these warnings have failed to come true as Chinese investors mainly stay at home. Beijing, facing political tension with the United States, is being cautious about global trade and M&As as well. To discuss how China is raising its M&A game on the world’s ‘grand chessboard’, the M&A Community hosted a webinar to analyze the alignment of forces from both a geopolitical and an economic point of view.

The US stays ahead but China is speeding up

Geopolitical risks are rising globally, says Klisman Murati, founder and CEO of Pareto Economics. Though some think that the US is losing their front seat, while other countries are fighting for this ‘vacant’ place, he doesn’t believe that this is true. The United States retain their dominant position, Murati thinks, listing several factors that make a nation influential:

  • economic growth;
  • active consumer market;
  • systemically important resources (natural resources and available technologies);
  • geostrategic position;
  • military balance.

‘On the whole, we see that the US has been dominating on all five sides. But as other nations grow, they are also able to develop these five characteristics,’ adds Murati, pointing at the Chinese case.

‘It is tempting to think that the upcoming US election may become the inflection point when the situation will either get better, or much worse, depending on personalities. But the US-China competition is deeply rooted,’ Reva Goujon, Managing Director for Intelligence at Martin+ Crumpton Group (MCG) offers another perspective to the story.

When we’re looking at the economic domain, regardless of who is in the White House, she says, the USA are sticking to their ‘you can’t have it both ways’ principle. It means you cannot simultaneously enjoy broad access to the global capital market and pursue massive state-backed initiatives.

Washington ultimately wants to coerce Beijing to adopt the Western standards and practices of capitalism where market efficiency comes first, she stresses. China, meanwhile, prioritizes stability over efficiency. ‘These are two fundamentally different models when you’re looking through the prism of political economics, not just through the markets,’ Goujon explains.

Why isn’t China investing?

The repercussions of this confrontation are often seen in the news. This May, for instance, seven American senators urged the Treasury Secretary, Steven Mnuchin to exclude Chinese companies from taking advantage of stock prices being driven down by the pandemic to buy strategic US assets. China is “looking to exploit the economic crisis wrought by the Covid-19 pandemic to gain control of distressed companies”, they argued.

Those American senators’ fears haven’t come true. In January-May 2020, compared to the same period in 2019, new outbound deals by Chinese companies are down 71% in volume and 88% in value terms. So, why isn’t China going on a spending spree overseas? Murati says, there are several reasons for this:

  • Heavier debt loads
  • Tighter domestic liquidity conditions
  • Beijing’s controls on outbound capital flows
  • An increase in trade and investment restrictions abroad.

Though there are several political and corporate actors in China who are lobbying for structural reforms, the Chinese government’s ‘careful balancing’ policy doesn’t allow those to happen, Goujon adds. This leaves Washington plenty of room to introduce restrictive measures against Chinese companies that can disrupt M&A activities. There could be lots of possible reasons, especially considering the fact that many Chinese firms blur the lines between public and private and simply cannot comply with US auditing standards.

‘When we think about the future direction of the regulatory aspect of the US/China economic tensions, and how this is going to affect the M&A game, it comes down to what the US does with its export control,’ says Shehzad Qazi, Managing Director at China Beige Book International.

Having restricted access to Western markets, Beijing under Xi has meanwhile loosened restrictions on foreign investments in key sectors, including car manufacturing and financial services. Thus, global firms started pouring capital into China, resulting in a spike in inbound M&As. In terms of restrictive measures or retaliation in response to US policies, Beijing is being very cautious, as Goujon points out.

Despite some hopes that Joe Biden’s potential presidency may open a new page in US/China relations, Qazi seriously doubts it. The actions of the US government and Congress in the last three years, he believes, have set a clear path for any future administration to follow, that is, further restrictions. ‘Biden’s campaign hasn’t sketched out its China strategy. The international policies they offer clearly show that there is a lot of foreign policy being continually envisioned,’ our panelist explains.

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