How mainland companies are riding out the slowing economy

March 05, 2016 08:01
Skyscrapers and people are reflected in a puddle of water in the early morning in the Bund in Shanghai. Chinese companies are resorting to dealmaking to ride out a slowing economy. Photo: Xinhua

Last year was tough for investors in A shares, which have gone through many ups and downs.

However, it was a bumper year for mergers and acquisitions (M&A) involving listed Chinese companies.

Deal volumes and value posted robust growth in 2015.

Chinese companies issued 1,444 regulatory announcements on M&A activities last year involving a combined 1.58 trillion yuan (US$241 billion).

By contrast, 475 M&A announcements were amde in 2014 involving 230.6 billion yuan.

Such tremendous growth has been largely driven by slowing economic growth in China which has prompted listed companies in traditional sectors to look for new growth engines amid shrinking profit margins.

Listed companies can revitalize their assets or acquire new assets which can bring inorganic growth and help stabilize profit.

It’s the best way to protect shareholder value against flagging economic growth.

M&A growth will remain robust given a subdued global economy and volatile financial markets, driving consolidation and cross-border deals.

Companies can hardly hedge against economic risks if they focus mainly on a single market.

The best solution is to diversify risk across markets and assets in different regions.

That would create a new wave of global M&As.

Listed companies that have advantage in capital markets should use all the tools at their disposal to offset the negative impact of economic downturns.

Those that have yet to spot the trend or failed to leverage it to expand their market share are set to fall behind their competitors.

Companies that have state-of-the-art technology or fast profit growth, or those that are less sensitive to economic cycles might simply disengage from the downturn but there have been very few of them.

Many central state-owned enterprises have undergone asset restructuring, debt restructuring, mergers, liquidation and other ways to reallocate resources more efficiently.

And many M&A deals have been made to allow companies to move into new emerging markets to supplement their organic growth.

Most domestic listed companies know the importance of inorganic growth in moving up the value chain.

Private placements have dominated their dealmaking.

Last year, 794 such companies completed private placements, raising more than 1.2 trillion yuan, a record high.

Almost 50 raised more than 10 billion yuan in such issuances.

Almost all of these private placements came with M&A deals.

Many domestic listed companies have undergone dramatic transformations and many of them have found new sources of inorganic growth.

Their share prices have fallen after posting a brief uptick.

Meanwhile, Chinese property developers are being targeted by insurance companies and other investors.

The trend is set to continue. Those companies should ride the trend.

This article appeared in the Hong Kong Economic Journal on Feb. 29.

Translation by Julie Zhu

[Chinese version 中文版]

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Chief Researcher, Public Policy Research Center, University of International Business and Economics