China’s overseas mergers and acquisitions may not have slowed down in 2017 and will probably boom in 2018

Mergers and acquisitions (M&A) have been one of the most important elements of China’s “going out” strategy after the Global Financial Crisis. However, the rapid pace of expansion hit an unexpected sudden snag in 2017 according to official figures. On that basis, most market participants are expecting a similar trend in 2018. We argue in this note that China’s cross-border M&A may have been larger than we think in 2017 and that there are reasons to believe that it will continue with its massive purchases this year. Beyond the official data, a number of domestic and external factors can explain the slowdown in China’s overseas M&A in 2017 to a certain extent . On the inter national front, most of Chinese government-supported M&A strategies met strong opposit ion from the US and, to a less er extent, from the EU. Domestically, the Chinese authorities took a series of measures to crack down certain types of foreign acquisitions, beyond the more general tighter capital controls since 2015. However, when one looks into some of the microdata in M&A, and in particular that of public sources such as the American Enterprise Institute, there is no such thing as a sharp reduction in China’s cross-border acquisitions in 2017, if anything, an increase. Such divergence between China’s official outward FDI and the more granular source can be explained by the increasingly important role that overseas subsidiaries of Chinese corporates have played in acquiring assets abroad. Those activities are not captured in the official data or even in some of the private M&A data providers who classify the M&A activities following the official rules for identification. All in all, we should expect China’s frantic overseas M&A activity to continue in 2018 as the underlying driving factors, especially the increasingly low growth prospects and the meagre return on assets, are still intact.