Regulatory and geopolitical uncertainty casts shadow over China M&A activity: Deloitte

“Uncertainty is a big word and (it) is affecting confidence,” said Stanley Lah, national leader for strategy and transactions at Deloitte China. “The main factor is that investors are simply not confident in the economy, confidence is not high and they want to see what steps the (China) government will take to boost 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 slump in housing prices, weak consumption and high unemployment.

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China’s economy grew by 4.7% in the second quarter, below expectations

China’s economy grew by 4.7% in the second quarter, below expectations

The slowdown has had an impact on dealmaking. In the first half of 2024, M&A volumes and values ​​in the Asia-Pacific region fell by 17% and 32%, respectively, compared to the first half of 2023. Deal volumes in China fell by 19%.

“People are more cautious when making long-term decisions and investments, which is why the number of transactions and activity is much lower,” Lah said.

Deloitte, which surveyed 42 Chinese and foreign companies across industries, ownership types and sizes on M&A activity, found that nearly two-thirds of respondents cited domestic economic and regulatory uncertainty as a major challenge to deal execution. More than 75 percent of respondents said international political and economic uncertainty affected their ability to successfully complete deals.

The study also found that fluctuating interest rates and less predictable economic policies can discourage investment decisions.

Despite the uncertainty, more than two-thirds of respondents expressed moderate confidence in China’s economic recovery and prospects, while almost 80 percent said the current economic environment was favorable for mergers and acquisitions.

Looking ahead, over the next 12 months, the majority of respondents expect the number of mergers and acquisitions to increase, with half predicting that the number of deals their organizations will complete will increase and 38 percent expect it to stabilize.

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

The strategic rationale for globalizing Chinese enterprises has expanded from pursuing markets, technologies, brands and natural resources to include supply chain integration and international operations.

“If we look at the globalization of Chinese companies, more of them are definitely deciding to expand overseas and this trend will continue,” Lah said.