China M&A market expected to be increasingly dominated by domestic deals in 2023 – PwC analysis

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China M&A in 2022 fell to an eight-year low at US$486bn – down 20% on the previous year.

For the second year, private equity deals made up nearly half the total.

Hong Kong, 23 February 2023 – China M&A fell to its lowest level since 2014 at US$486bn, down 20% compared to 2021. The decline would have been larger but for some large transactions to reform state-owned enterprises (SOEs), according to PwC’s M&A 2022 Review and 2023 Outlook.

“We expect announced deals to continue to decline in the first half of 2023, due to the exceptionally soft conditions for deals processes last year,” said David Brown, PwC Asia Pacific Deals Leader. “However, recent government measures to stimulate investment, along with the removal of COVID-19 restrictions, will have a positive influence on M&A. We believe investor confidence will gradually recover as public market valuations improve.”

One indicator of the soft market conditions was the fall in ‘mega-deals’ (greater than US$1bn) to nearly half the long-term annual average. There were only 54 such mega-deals in 2022, against 97 in 2021, with 35 of these related to SOE reform – compared to 22 the previous year.

Domestic and foreign strategic M&A (where buyers seek to integrate the acquisition into their existing business) fell 19% by value. Deal values fell in almost all sectors, mitigated only by an uptick in industrials-related deals. Many of these were focused on SOE reforms, SOE-driven industrial upgrades, re-capitalisations and integrations between large SOE groups. Government policies on industrial upgrades significantly influenced domestic M&A, but the high-tech, real estate and consumer product sectors all trended down.

Despite declining by 23%, private equity (PE) investment was the largest single category overall for the second year – representing nearly half of all deal activity. PE/VCs took advantage of frothy M&A market conditions and relatively healthy public- and private-market valuations in the first half of 2022 to initiate exits from their growing portfolios. But overall, and especially in the second half, China’s capital markets were lukewarm last year. Regulatory issues affecting Chinese issuers continued to take US equity markets largely out of play, while Hong Kong was also soft with lower valuations. The Shenzhen and Shanghai STAR markets retained their dominant positions as IPO exit venues for PEs, while the new Beijing Stock Exchange saw 44 exits in the year.

Outbound M&A activity continued to be moribund in 2022, as travel restrictions and geopolitical issues affected both the ability and confidence to pursue large outbound transactions. Analysis by sector shows that China has strong investment interest in energy and power, high technology and healthcare. In volume terms, deals have still been happening in the US and Europe, but these have been small in dollar terms and therefore less likely to receive regulatory attention. Asia became the second most popular destination for outbound investments.

Looking forward, PwC’s M&A Review and Outlook sees some positive signs for 2023. These include: the release of pent-up demand with the removal of COVID-19 restrictions; measures from China’s leadership to address the real estate crisis; relaxation of curbs on the internet economy; and a re-prioritisation of economic growth more generally. Ongoing record levels of ‘dry powder’ and pressure to deploy this capital should also lead to more active M&A markets in 2023. The economic dislocations associated with COVID-19 and geopolitical trends will also give rise to transactional and transformational activity – including related to distressed situations.

“We expect to see some improvement as China’s post-COVID reopening starts to take effect,” said Chris Chan, PwC Mainland China and Hong Kong Financial Services Deals Leader. “But it will be rather cautious and gradual, with a few stops and starts due to the various uncertainties in play. As a result, we think that the M&A market in China will become even more domestically orientated, at least in the short term. We also expect to see increased demand for outbound investment, especially into the Asia-Pacific region. We forecast full-year 2023 numbers to be close to last year’s. Activity is likely to be weaker in the first half, but stronger in the second.”