Q&A: Zhong Lun's Yun Zhou

Q: What has been the impact on deal flow of government guidelines relating to outbound investment?

A: The capital control issue has been around for five or six years, but it is only in the last three years that the government has realized how much money is going offshore. Prior to the clarification in August, they were figuring out what to do. There was no change in the regulations, but more of a semi-policy to slow down the amount of capital being converted into US dollars. They started looking more closely at the kinds of deals investors were trying to do and many transactions that fall under the encouraged category today were hit as badly all the others. The clarification is straightforward, essentially laying out restricted and encouraged categories. So there should be an increase in the number of deals.

Q: What do the changes mean for deal size?

A: Size-wise, there may not be an increase because it is now clearly set out that investment in real estate and entertainment and industries like that are not encouraged. If you want to buy another football club you can forget about it. Industrial deals tend to be smaller. They involve technologically advanced companies and not many large assets of this nature are for sale. It is more about medium-sized businesses that have some kind of synergy with the China market.

Q: So, a deal the size of ChemChina’s $43 billion acquisition of Syngenta will not be repeated?

A: It’s kind of a one-off. Most of the state-owned enterprises (SOEs) are not like SinoChem, and after Syngenta, SinoChem is pretty much done, it must focus on domestic stability. The energy sector is a bit different. Some of the deals SOEs have done in the past haven’t been particularly successful – Nexen is valued at $0.20 on the dollar from the price CNOOC paid for it because of difficulties with the oil sands assets – but they would probably still look at potential investments. That said, I think these companies would generally be cautious, in terms of deal size, given the current climate.

Q: What about privately-owned businesses?

A: Among the private enterprises, only a handful have any experience doing outbound M&A. They would likely be cautious from the beginning and not engage in many deals. As for HNA Group, Fosun, Anbang Insurance Group and Wanda Group – all of which were previously active – they are under tight controls these days because they have domestic issues to address. I wouldn’t expect them to be particularly acquisitive, at least not soon.

Q: Each of those four companies has assets offshore. Couldn’t they use those resources to support international investments?

A: Offshore capital is not controlled by the Chinese government, so companies that have it can do deals. However, they might be watched closely because they are probably highly leveraged. And if they are leveraged with Chinese banks, that’s a problem. A lot of outbound deals depend on Chinese banks with offshore operations for acquisition financing. These banks must follow the new policy. As a result, If a deal isn’t in one of the encouraged categories it will be next to impossible to get financing.

Q: Has the government’s targeting of four high-profile companies essentially sent out a warning signal to the rest of corporate China?

A: People certainly get the message now, but if you are being encouraged you would not be afraid of doing deals. Remember the Global Switch data center deal in the UK. That was announced last December when the government controls were at their peak, but the deal still got through.

Q: To what extent are investors trying to add One Belt One Road (OBOR) context to deals in order to better their chances of winning approval?

A: People are trying to package it up like that but how difficult is it for the authorities to see it’s not a OBOR deal? I would advise people, “If you have an angle, try it, but if you don’t have an angle then you don’t have an angle.” OBOR deals are difficult for private businesses. Most of the investment activity is from state-owned enterprises (SOEs) because there is a political need for them to do this. The outcomes are not necessarily financial-driven, it’s government policy.

Q: Are Chinese groups still disadvantaged compared to other foreign investors when pursuing assets overseas?

A: There are disadvantages for Chinese buyers offshore, and you can’t really say foreign sellers are in the wrong – it’s all about business. There were genuine concerns that with the policy murkiness and general crackdown on frivolous foreign investments that were not well thought out, a Chinese buyer would not make it through government approval processes and deals would fail. But the Chinese responded by putting up more money. And now the situation is improved because the policy environment clearer, whatever dust clouds that were present have gone. It gives sellers one less reason not to favor a Chinese buyer.

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• Topics
• Greater China
• Buyouts
• Advisory
• Regulation
• China
• Outbound investment
• M&A