In the News: 10-Year Outbound Low; Antitrust Amendments; and UK Connect Suspended
January 05, 2020 | BY
Vincent ChowChinese outbound M&A hits decade low; draft amendments to anti-monopoly law released; and Shanghai-London stock connect suspended over political tensions
China outbound M&A hits 10-year low
China's outbound mergers and acquisitions (M&As) have plummeted to their lowest levels in a decade amidst a bruising China-U.S. trade war and growing scrutiny over Chinese investments globally. Chinese outbound deals totaled $41 billion in 2019, almost half that of 2018, according to Refinitiv data, Reuters reported. Meanwhile, outbound deals in the U.S. in 2019 fell 80% from the previous year to $2 billion.
The Committee on Foreign Investment in the U.S. (CFIUS) has been scrutinizing deals by foreign acquirers for national security risks. It has blocked several deals involving Chinese firms acquiring U.S. assets including Chinese company Kunlun and its acquisition of gay dating app Grindr due to data security concerns. The foreign investment watchdog has seen its powers significantly expanded in recent months over fears of Chinese access to sensitive U.S. technology. A PwC report released in August highlighted domestic deals as the main driver for Chinese M&A in the future.
Research firm Rhodium estimates that Chinese investors abandoned deals in the U.S. worth over $2.5 billion in 2018 due to CFIUS concerns. At home, Chinese authorities have cracked down on highly leveraged private investors and imposed strict outbound investment controls, bringing about a collapse in outbound investment since 2016. Gone are the days when major Chinese conglomerates such as Anbang Insurance Group Co. and HNA Group Co. were making high-profile acquisitions every few months, such as Anbang's purchase of landmark New York hotel Waldorf Astoria for $2 billion in 2014. "The trade war sentiment continues to weigh on overall outbound China M&A activity, and we expect this to particularly impact China-U.S. deals in the near future," head of Asia Pacific M&A at Credit Suisse Group AG Joseph Gallagher told Bloomberg in July.
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China releases draft anti-monopoly law amendments
China is looking to toughen up and expand the scope of its antitrust regime at a time when technology companies such as Alibaba and Tencent are enjoying unprecedented levels of market dominance. The State Administration for Market Regulation (SAMR), China's antitrust regulator, released the draft amendments to the Anti-Monopoly Law on Jan. 2, which expands the definition of what constitutes a dominant position with potential to harm competitors, as well as increases the penalties for violations of the law. SAMR is seeking public comment on the draft until the end of January.
Under the new proposed regime, violators may be fined up to 10% of their previous year's sales, or up to 50 million yuan ($7 million) if they did not have sales in the last year – a 100-fold increase from the current law. In terms of scope, the draft law adds data-collecting ability to the criteria for determining abuse of market dominance, as well as the scale of internet operations and economies of scale. In late December, SAMR fined Japanese automaker Toyota $12.5 million for violating antitrust laws by setting minimum resale prices for its Lexus cars.
Adopted in 2007, China's Anti-Monopoly Law prohibits "monopoly agreements", defined as "agreements, decisions or other concerted acts that eliminate or restrict competition." In the years since the law was implemented, China has seen its technology sector grow exponentially with a handful of companies such as Alibaba, Tencent and Huawei dominating the many markets they participate in, including smartphones, mobile payments and e-commerce. As such, the government has recognized the need to update relevant rules and regulations to extend antitrust supervision over these new, dominant businesses. The proposed amendments do just that. According to SAMR, it launched 23 antitrust investigations in July-September 2019.
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Shanghai-London stock connect suspended over political tensions
China has suspended the stock connect program linking the Shanghai and London bourses due to political tensions with the U.K., several major news outlets have reported. The program, launched in June 2019, allows for cross-border listings between the two stock exchanges and for foreign companies to float shares in mainland China for the first time. An anonymous official at the Shanghai Stock Exchange confirmed to the Financial Times that the program is suspended with "no timetable" for restarting.
Citing anonymous sources, the Reuters report said that all five sources attributed the suspension to ongoing political strife between China and the U.K., including over the positions taken by the U.K. regarding the protests in Hong Kong and the detention of a former Hong Kong consulate staff member in Shenzhen. Sources also told Reuters that a planned listing in London by Chinese alternative energy operator SDIC Power in December 2019, the second listing under the new scheme had it went ahead, was postponed due to the Chinese government's suspension of the stock connect program.
Huatai Securities, one of China's largest brokerages, was the first Chinese company to list in London under the new stock connect program in June 2019. It raised $1.54 billion through the issuance of depository receipts (bank certificates representing shares in a foreign company traded on a local stock exchange). The value of its receipts fell 11% in London following reports of the program being suspended. No U.K.-listed company has issued depositary receipts in Shanghai since the program was launched. Traders have pointed to the two-day settlement cycle for trades as a significant problem inhibiting the stock connect program in light of the time difference between the Shanghai and London markets. The new, recently approved revised Securities Law in China defines depositary receipts as securities for the first time.
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