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Jonathon Adams-Kane
Economist, International Finance and Macroeconomics Research
Capital Flows and Systemic Risk
Dr. Jonathon Adams-Kane is a research economist with the international finance and macroeconomics team at the Milken Institute. His research is mainly on international capital flows and financial stability, with a focus on analyzing structural changes in the international financial system, how crises spread among countries through international banking, and...
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Will the Surge in Chinese M&A in Southeast Asia Survive a Regulatory Clampdown?

By: Jonathon Adams-Kane
September 08, 2017

This post is excerpted from a new Milken Institute White Paper, “Increased Chinese Presence and Other Developments in the Southeast Asian Cross-Border M&A Landscape.”

Historically, cross-border mergers and acquisitions (M&A) in Southeast Asia were driven largely by investment flows into the region from buyers in a few key advanced economies—the U.S., the U.K., Japan, and Hong Kong. Investors based in Singapore and Malaysia accounted for most of the intra-regional deals.[i] Notably, Chinese buyers became active players from 2006 to 2010, but they retreated subsequently.

Although there has been a resurgence of Chinese acquisitions in Southeast Asia (see below), ongoing Chinese regulatory changes to promote financial stability may cut short the recent wave of overseas investment. This summer, capital controls were tightened as Chinese regulators signaled a more disapproving stance toward large capital outflows, including overseas acquisitions. On June 22, the China Banking Regulatory Commission (CBRC) made headlines by ordering banks to gauge their exposure to the handful of conglomerates most conspicuously engaged in large overseas acquisitions. Then on August 2, the State Administration of Foreign Exchange (SAFE) signaled that it is hardening its stance as well, with a particular focus on the practice of using collateral in China to obtain funding for foreign acquisitions.

Chinese M&A into ASEAN Countries ii

Chinese M A2

This regulatory clampdown appears to be part of a broader sweeping shift in economic and regulatory policy, which may be designed to ensure financial stability in the run up to the leadership transition this fall during China’s National Party Congress. Capital outflows, including cross-border acquisitions, have been discouraged to ensure the stability of the renminbi exchange rate and overall financial stability. Consequently, there has been increased scrutiny of M&A activity by the CBRC and SAFE, and recent official statements have noted the potential implications of M&A activities for financial stability. Heightened regulatory vigilance has received an unprecedented level of political support from the top government level. Maintaining financial stability has a newly elevated policy status: it has become an issue of national security.[iii] The new regulatory actions involve an unusual degree of coordination across the three main financial regulatory commissions—those in charge of banking, securities markets, and insurance—and the People’s Bank of China (PBC). Personnel changes in the top leadership positions of all three commissions punctuate the importance the government places on effective coordination.[iv]

The pace of near-term Chinese outbound investment will be influenced by the government’s immediate tactical policy goals designed to ensure stability. It is likely that motives for the new policies include the central government’s desire to temper credit growth, limit the rise in corporate leverage (currently at unprecedented high levels), and support the tentative recovery in reserve accumulation by maintaining stringent control of capital outflows. Another reason for continuing capital restrictions is to ensure that economic and financial stability continues as members of the Politburo Standing Committee are selected later this year.[v] Towards this latter end, targeted financial regulation may complement the ongoing anti-corruption drive.

The impact of the new regulatory regime for outbound Chinese M&A remains uncertain. The longer-run outlook depends on how long regulators believe stringent controls need to be maintained to ensure financial stability. There could be a change in the composition of acquirers—for example, regulators may promote the role of state-owned enterprises, including new “state capital investment and operation” companies, and state-backed private equity funds. A related question concerns how, or whether, policy makers in the recipient countries should court investment from foreign state-owned companies. There is always the concern that such enterprises may operate more in the interest of foreign governments than private shareholders. Assuaging such concerns will require instituting strengthened corporate governance and maintaining shareholder vigilance. 

In the meantime, it is likely that M&A flows from China will slow, and official policies toward such investments will become less certain. Heightened regulatory scrutiny will cause Chinese companies to become more cautious in making foreign acquisitions. The pace of large acquisitions, in particular, will become less predictable (and perhaps more volatile) as prospective Chinese buyers wait to see what deals the authorities will allow in this new regulatory environment.

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The views expressed here are those of the author and do not necessarily reflect those of the Milken Institute or its affiliates. 

Reviewed and approved to distribute by William Lee, Chief Economist at the Milken Institute.

[i] Until 2016 Thai buyers played a relatively minor role in the region, apart from two large deals in 2013. An overview of the recent surge in Thai intra-regional deals is included in the paper.”Indonesia made one large regional acquisition (of Malaysian oil and gas assets) in 2015.

[ii] The deals included in the calculation are those in which the target is based in an ASEAN country, and the acquirer is a single buyer in (mainland) China or a consortium that includes at least one buyer in China. Acquirers in Hong Kong are not included; in some cases, a Chinese company may make an acquisition via a holding company in Hong Kong, but any such deals are not included here. For each consortium deal, the Chinese share is estimated from news articles or legal documents and only the Chinese portion of the deal value is included in the figure. A caveat regarding incomplete data is given in the paper. * 2017 data are through July; deal count includes 19 pending deals announced this year, in addition to five completed deals. Calculations for earlier years include only completed deals.

[iii] Barry Naughton, “The Regulatory Storm: A Surprising Turn in Financial Policy,” China Leadership Monitor, no. 53 (Spring 2017).

[iv] The chiefs of all three commissions were removed between February 2016 and April 2017. It is normal for officials to be changed over preceding a party congress, but this wave was unusual in that the new chiefs of the CBRC and the China Securities Regulatory Commission both have strong ties to Zhou Xiaochuan, the reformist governor of the PBC, bringing these three regulatory bodies much closer together (ibid.). A new chief of the China Insurance Regulatory Commission has not yet been named at the time of writing.

[v] Ibid.; Lucy Hornby, “Chinese crackdown on dealmakers reflects Xi power play,” Financial Times, August 9, 2017.