In the News: China-US Tariff Hikes; Chinese Outbound Deals Plummet; Goldman Set For Majority JV Control; and Beijing to Trial Foreign Investment in VPNs

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Chinese outbound M&A plummets in H1

The value of outbound M&A deals by Chinese companies in the first half of the year almost halved that of the second half of 2018 according to a new report from the accounting firm PwC. Outbound M&A value totaled $26.8 billion in H1, a 48% drop from H2 2018 and a 33% drop from H1 2018. Outbound M&A by state-owned enterprises dropped to a decade low of $2.3 billion, compared with $7.4 billion in H2 2018.

The shrinking outbound M&A value was due to the decline of large purchasing deals by Chinese entities, George Lu from PwC told Caixin. Just four outbound deals valued over $1 billion were completed in H1 compared with seven in the same period the previous year. Deal makers say the China-U.S. trade war and the imposition of tariffs on both countries' goods have exerted downward pressure on Chinese acquisitions overseas. Meanwhile, domestic M&As led by Chinese companies rose to $142 billion in H1, an 8% increase from H2 2018.

Chinese companies are facing increasing hurdles to investing overseas both at home and abroad. In the U.S., the Committee on Foreign Investment in the United States (CFIUS) is making it more difficult for Chinese entities to invest there due to concerns about China's acquisition of advanced U.S. technologies. The research firm Rhodium estimates that Chinese investors abandoned deals in the U.S. worth over $2.5 billion in 2018 due to CFIUS concerns. The European Commission has also stepped up its scrutiny of Chinese investment – China Three Gorges Corp.'s attempted $10.2 billion takeover offer for Portuguese utility Energias de Portugal collapsed in April following concerns about regulatory approvals. At home, Beijing has cracked down on highly leveraged private investors and imposed strict outbound investment controls, bringing about a collapse in outbound investment since 2016.

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Goldman set to take majority control in Chinese joint-venture

Goldman Sachs will take majority stake in its Chinese joint-venture (JV) pending regulatory approval. The U.S. investment bank submitted an application to the China Securities Regulatory Commission on Aug. 19 to increase its holding in the JV from its current 33% stake to the maximum allowed 51%.

Founded in 2004, Goldman Sachs Gao Hua Securities is a JV with Beijing Gao Hua Securities which offers investment banking services such as equities and bond underwriting. Goldman follows other major international investment banks in seeking majority control of their respective Chinese JVs under new rules allowing them to do so. UBS was the first to be approved under the new rules in November 2018 to take majority stake in their JV, UBS Securities Co. The Swiss bank was followed by JP Morgan and Nomura who received approvals to launch new JVs from scratch, while Morgan Stanley and Credit Suisse are waiting for approval for their existing JVs. JP Morgan is also awaiting approval to take majority control of an existing JV.

The lack of control over their Chinese JVs has long been a source of frustration for foreign banks in China who say that majority control would increase the services they could provide through their JVs. In 2017, China relaxed limits on foreign ownership of JVs in its financial services sector by increasing foreign shareholding caps to 51% for securities, investment manager and life insurance JVs. Then on Jul. 30, the State Council announced that the caps will be totally removed by 2020 to allow foreign financial firms to wholly own their Chinese businesses.

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Beijing announces trial to allow foreign investment in VPN services 

The city of Beijing unveiled plans to allow foreign investment in virtual private network (VPN) services within a trial zone by the end of the year. The Beijing Municipal Bureau of Commerce announced that it hopes the relaxation of restrictions, approved by the State Council in January, will attract international telecom operators to provide VPN services for foreign-invested companies in Beijing.

The new policy is part of a three-year plan by the municipal government to open up the city's services sector, although foreign ownership in VPN providers will be capped at 50 percent. VPNs allow users in China to bypass the country's "Great Firewall" which currently bans some of the world's most popular websites including Google, Twitter and Facebook. They work by encrypting and rerouting data traffic to servers abroad.

The PRC Cybersecurity Law introduced in 2016 requires network operators in critical sectors to store their data locally, a move which has been criticized by foreign companies for increasing the risk of their business secrets and sensitive information being compromised. Beijing is home to many multinational companies' mainland headquarters and has the most Big Law offices on the mainland according to The American Lawyer. Pilot schemes in limited areas are often used to gauge the viability and impact of new policies in China before being rolled out at the national level, writes Mathew Alderson, a Beijing-based attorney at Harris Bricken. However, plans to loosen China's internet restrictions for foreigners have been mooted before, including in Hainan and the Shanghai Free-Trade Zone, but neither saw reforms in the end.  

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