Chinese executives focus on growth, non-BRIC emerging markets as confidence in economy increases significantly

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Of the 1,600 companies surveyed world-wide, Chinese executives reported the following:

  • 77%  are focused on growth, up from 45% a year ago as confidence in economy rebounds – concentration on innovation and non-BRIC emerging markets
  • 75% see improvement in Chinese economy – a two-year high, and highest among the BRIC markets
  • 80% expect China deal volumes to rise, but M&A appetite still recovering slowly, 32% expect to do deals in the next 12 months, up only modestly from 29% six months ago and 11% a year ago
  • Debt-to-capital ratios seen climbing upward; 40% looking to refinance loans in the next 12 months
  • Regulatory environment now tops the boardroom agenda; more than half see regulatory issues as the main barrier to deals

Hong Kong, 12 November 2013 -- Growing confidence in both global and local economic conditions and an awareness that GDP expansion is slowing to a more sustainable rate at home has focused the minds of Chinese executives firmly on growth, according to EY’s ninth semi-annual Capital Confidence Barometer (pdf, 7.2mb). 

Over three-quarters (77%) of Chinese respondents now say their corporate strategy is focused on growth, up from 45% a year ago.

“As GDP growth has slowed in China, the more sophisticated boards are pushing for more expansion into new geographic markets and innovation,” says Bob Partridge, Greater China Leader, Transaction Advisory Services for EY. “Chinese companies are extremely conscious of the need to find new paths to growth.”

Much of the newest expansion is likely to be directed toward non-BRIC emerging markets, according to the results of the survey, with 58% of respondents prepared to spend more than 25% of their acquisition capital in non-BRIC countries. Top 5 countries for investment outside of China are Vietnam, Myanmar, India, Brazil and US.

In contrast, the top 5 destinations for all corporates globally show a clear BRIC and mature market focus: China, India, Brazil, United States and Canada. “Global companies continue to see China as a top 5 destination however, they are also once again allocating substantial acquisition capital to developed markets – these mature economies will likely lead the modest return of M&A globally,” says Pip McCrostie, Global Vice Chair, Transaction Advisory Services for EY. “Companies will also continue to pursue the emerging and frontier markets as growth mandates take hold. Ultimately, investment capital will flow to those regions which provide the best balance of risk-reward opportunities.

Bernard Poon, EY Transaction Advisory Services Leader of Hong Kong and Macau Region says, “Overall, 79% of Chinese executives believe the global economy is improving, up from 53% six months ago, and 75% are confident that local economic conditions are getting better up from 58% six months ago.” Chinese companies are 15 percentage points more confident than their global counterparts and are the most bullish of the BRIC countries about both the global and local economy, which is especially notable given that China has fallen from first place to third place in the Barometer’s ranking of most attractive investment destinations, after both India and Brazil.

80% of executives expect China deal volumes to rise in the next 12 months. Additionally deal fundamentals are improving, 38% of respondents are confident about the likelihood of closing acquisitions over the next year, up from 12% a year ago; 33% are confident about the quality of acquisition opportunities, compared with 25% a year ago; and 50% are upbeat about the number of acquisition opportunities, up from 32% a year ago.  However, despite the broader optimism, just 32% of Chinese companies expect to pursue an acquisition in the next 12 months, only slightly above the 29% who planned to do so in April, although well above 11% a year ago.

Regulatory issues a key concern

Some of the reluctance to do deals reflects a subtler split between domestic and outbound investment sentiment, especially with regard to the regulatory environment.  Chinese respondents accept that the regulatory environment is generally supportive of business on both the global and local levels; yet underlying worries are more evident in questions about the boardroom agenda, where Chinese executives list regulatory issues as their top priority, up from third place six months ago and fifth place a year ago.

Moreover, 51% list the regulatory environment as the top reason for not pursuing acquisitions in the next 12 months, compared with 30% of global executives.

“Chinese capital markets are opening slowly and therefore questions regarding the developing regulatory environment exist,” Partridge notes. “At the same time, there is more confidence in the overseas regulatory environments now that some of the political uncertainty in countries such as the U.S. has receded.”

Debt levels creep up

Chinese companies are still carrying fairly low levels of debt on their books. However, Chinese respondents are more likely than their global peers to see debt-to-capital ratios increasing over the next 12 months. Meanwhile, 40% of those surveyed expect to refinance debt obligations in the next year, nearly double the 21% who said so in April and four times the 10% who said so a year ago.

“The slowdown at home and the race for growth is clearly pushing leverage higher for many Chinese companies,” Judy Tsang, Partner of Transaction Advisory Services at EY says. “This adds another layer of risk, which helps explain why Chinese companies continue to be cautious about increasing their exposure to the M&A market.”

Conclusion

Chinese confidence is beginning to rebound, but political and economic uncertainty continue to moderate the appetite for deals.

“Chinese companies are eager to find new paths to growth, but in the short-term they will continue to be cautious with M&A opportunities,” Partridge concluded.

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About the survey

The EY Capital confidence barometer is a survey of over 1,600 senior executives from large companies around the world and across industry sectors conducted in September. 124 Chinese executives participated. The objective of the Barometer is to gauge corporate confidence in the economic outlook, to understand boardroom priorities in the next 12 months, and to identify the emerging capital practices that will distinguish those companies that will build competitive advantage as the global economy continues to evolve. This is the ninth bi-annual Barometer in the series, which began in November 2009.

About EY

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This press release is issued by EY, China, a part of the Ernst & Young global network.