Prolonged upward trend for M&A is set to continue in China

Confidence in capital markets drives continued dealmaking appetite for Chinese companies.

Action outweighs uncertainty in the C-suite of Chinese companies, according to the latest EY Global Capital Confidence Barometer. With 56% of Chinese executives expecting the global M&A market to improve over the next 12 months, Chinese respondents anticipate the period of prolonged M&A growth they’ve experienced to continue. A majority also remain optimistic in the near-term economic outlook. Chinese executives also generally have positive attitudes toward digital transformation and show strong confidence in innovation culture within their organizations.

Despite tariff and trade concerns, Chinese executives don’t foresee an economic slowdown ahead

At a macro level, our latest M&A survey reveals that global economic activity has slowed in some of the major economies in 2019, but most major economies are still growing. Challenges continue to arise from tariff and trade concerns and uncertainties over geopolitics and national politics. These risks are putting downside pressures on export-oriented countries.

However, 70% of Chinese respondents do not expect an economic slowdown in the short and medium term. While there has been more speculation about the potential of a global correction, executives do not see this on the immediate horizon and a majority does not expect a severe downturn. Companies should be taking advantage of today’s market conditions to reassess their portfolio vulnerabilities and divest assets that are not part of their future growth strategy.

Market shocks and reversals in the short run can be unpredictable and happen at any moment. While most Chinese respondents are positive in their outlook for the next 12 months and their confidence in capital market remains robust, globally, companies have an opportunity to use the current environment of ultra-low, even negative, interest rates to optimize their capital structure to safeguard against potential threats.

Chinese companies focus digital efforts on products and services

Digital and its transformation have created positive impacts on the future of companies. Meanwhile, Chinese respondents are aware that technology is both an enabler and a threat.

Unlike global respondents, Chinese respondents are more passionate about delivering innovative products and services, and their digital capabilities are more likely to be centralized under a Chief Digital Officer or a Chief Technology Officer (67%). Yet, while China excels in creating a customer-oriented digital environment, it lags behind leading economies in business-oriented digital environment, such as manufacturing and supply chain.

Bolt-on acquisitions favored as M&A appetite remains robust

Although Chinese companies face challenges when making overseas investment, 46% of Chinese executives expect to actively pursue M&A deals in the next 12 months. Despite geopolitical fears or the shadow of an economic slowdown, companies are actively looking to M&A to navigate current and potential barriers to growth.

As companies evaluate a variety of deals to reinvent business models in response to the changing technological and competitive landscape, 48% of Chinese respondents expect an increase in their M&A pipeline, while 59% of Chinese respondents expect to close more deals over the next 12 months.

Most companies favor bolt-on acquisitions (66%) to complement existing business and transitional capabilities acquisitions (23%) that change the way companies operate, digitize and expand new ways to serve customers. In terms of industry, life science (85%), media and entertainment (75%) and technology (54%) rank the top three among M&A activities to be pursued over the next 12 months.

Talent and technology will continue to be deal drivers

As Chinese companies look ahead, finding the right talent and technology are quickly becoming strategic drivers of M&A deals, while long-term value beyond traditional finance is becoming a key performance indicator for executives.