EY 9th Greater China Capital Confidence Barometer

October 2013

9th Greater China Capital Confidence Barometer

Push for growth

  • Share

Slower economic expansion in China is driving the need for new growth strategies and highlighting conflicting sentiments about investment.

Confidence in economic outlook rises

Our ninth bi-annual Capital Confidence Barometer comes at a time of rising deal activity after five years during which M&A has fallen globally. Chinese executives are more confident about the outlook for both the global and local economy than was the case six months ago, as political and economic developments on the world stage show some signs of stabilizing.

China’s economy grew by 7.8% in the third quarter compared with the same period a year earlier. This is the first time GDP growth has accelerated in three quarters, following government stimulus and tax cuts designed to raise factory output and investment.

Chinese executives are also the most optimistic of their peers in the Brazil, Russia, India and China group of markets, with 84% saying they are confident about global economic growth , compared to just over half of those in BRIC countries. At the same time, as the Chinese economy adjusts to a generally slower rate of expansion, the majority of companies are more acutely focused on growth, both at home and abroad.

Caution and optimism

Growth strategies will focus on pursuing new sales channels and innovations to expand into new geographic markets and product lines. Yet, residual caution over the scope of growth opportunities and conditions for taking advantage of them mean Chinese companies’ appetite for M&A is increasing at a glacial pace, similar to that of global companies, although an overwhelming majority expect deal volumes to increase in the next 12 months.

This paradox between caution and optimism reflects a split in attitudes toward domestic, versus outbound opportunities, particularly with regard to perceptions of the regulatory climate and its impact on transactions. With Chinese capital markets opening gradually and the regulatory environment still fluid, the domestic market is currently stymied by a significant degree of pent-up demand.

In contrast, confidence in the overseas regulatory climate is increasing as political uncertainties have subsided. Just a year ago many Chinese deals remained trapped in the queue for approval ahead of the US presidential election.

Innovation and new markets as growth strategies

This outward looking trend extends to developing markets, with investors continuing to migrate towards non-BRIC emerging markets such as Vietnam and Myanmar, although the number of investments in the latter has been limited so far. When deals do happen, domestically they are likely to be up to US$500m in value. Those expecting to deals up to US$1b has more than doubled in the last six months–a bullish response to overseas opportunities.

Chinese companies are more upbeat about the economy and focused on growth than they have been for some time. The next few months will determine whether they can regain sufficient confidence in the deal environment to translate that optimism into action.