February 2018

China’s and Japan’s investment in the West continues to increase, with a healthy pipeline for future acquisitions.

Since the financial crisis, the Chinese corporate sector began looking outwards, initially with an appetite for raw materials and resources. This gradually evolved into other sectors and by 2015-2016, Chinese companies were buying technology, consumer brands and distribution channels abroad to create vertical synergies.

Investment peaked in 2016. We saw a significant drop in deal volume in China in 2017 following the new regulatory landscape, cutting total outbound activity by roughly half of what it was a year before – the number of closed outbound deals from China decreased from $54 billion for the first three quarters of 2016 to roughly $25 billion over the same period in 2017. Capital controls came into effect when outbound M&A activity was at an all-time high, which in turn contributed to reduced foreign currency reserves. In 2016, China’s reserves shrank by almost $320 billion, to $3.011 trillion, the lowest level since 2011. This gave rise to economic and political pressures to ease capital outflows. Following policy adjustments over 2017, China closed the year with reserves of $3.14 trillion, thus igniting hope that some of the restrictions may ease.

At the same time, Japanese corporates, which have been consistent long-term investors in the US and Western Europe, became more active. “Japan Inc.” started to replace some of the reduced demand from Chinese corporates and had announced outbound deals totaling $52 billion by the third quarter of 2017. Ultra-loose monetary policy and anemic GDP growth continued to shape Japanese corporates’ desire to find higher-return opportunities for their excess capital abroad.

Throughout 2017, these Asian giants took turns in the global M&A league tables. Japan led the first quarter in the US, announcing deals worth $11 billion in value. China reclaimed its global lead, with announced outbound deals totaling nearly $54 billion for the first half of the year, largely driven by a strong focus in EMEA. Despite a strong first half, the rest of 2017 did not stand up to outbound China trends of the past few years, and 2017 full-year volumes are expected to fall far short of 2015 and 2016 levels. In terms of sector composition, Japanese investments were spread evenly across a range of sectors, whereas Chinese companies had a heavier focus on traditional sectors of real estate and natural resources and a healthy focus on TMT assets as well.


The decrease in China and Japan outbound M&A could be partly explained by political developments, including uncertainty surrounding the outcome of the Communist Party Congress, while the surprise Japanese elections led to a tapering of the acquisition spree.

As a provider of solutions to Chinese and Japanese clients to support these transactions we see that Chinese corporates are increasingly using escrow accounts in New York and London. In addition to allowing them to express their interest, these accounts provide them with the ability to smoothly transfer funds from China to counterparties in Europe and the US once the transaction is agreed upon. 
Looking into 2018, we expect an ongoing healthy appetite for future acquisitions from both China and Japan. Underlying drivers of slowing growth in both China and Japan domestically, relatively cheaper financing costs and excess capital generation could likely create economic incentives for corporates in both countries to seek opportunities abroad.

China’s foreign reserves have stabilized, thanks in part to limitations on outbound capital flows. Additionally, the government’s commitment to cool the property market, accelerate State-owned Enterprise reform and late cycle consolidation are key factors that will create need for investment reallocation, both domestically and abroad. The recent dbAccess China 2018 event talked about a continued strength in the equity valuations of Chinese companies, underpinned by structural and cyclical drivers. This should help Chinese corporates to maintain easy access to much-needed liquidity for engaging in international M&A. In certain areas, financial leverage regulations will become more stringent but acquirers with healthier balance sheets should see a more receptive regulatory environment.
In Japan, Shinzo Abe’s re-election has reduced political uncertainty and reaffirmed continuation of the Abenomics policies of domestic corporate reforms and loose monetary policy. Supported by a stable political climate. A strong domestic corporate sector is expected to continue scouring international markets for opportunities to complement and enhance their business model.

Furthermore, an increasing trend of investments which allow access to future opportunities will continue as new technologies upend traditional markets. Chinese and Japanese corporates toned to access innovation and customers in the US and Western Europe to remain globally competitive, especially in innovation-driven industries like autos, Artificial Intelligence, technology and pharma. Many recent acquisitions and joint-ventures originated by either China or Japan bear evidence to this trend. The political climate could be a significant wild card, limiting Chinese corporates’ ability to access the US market. However, this should be off-set by a view of a transactions based on underlying economic merit leaving room for deal growth. As this cross-border M&A landscape continues to evolve, these corporates are requiring specific services to enable their deals to close successfully.  In the case studies below we look at two clients who needed a segregated collateral account and an escrow to hold loan proceeds for a few months before an acquisition 

Case study 1: Chinese acquisition of a US real estate property fund/company

Deutsche Bank assisted in this transaction, funded through a shares-backed margin loan. The bank held $3 billion in shares in a segregated collateral account to evidence that the funds were ready in-country prior to closing. Further control accounts were subsequently opened to hold shares as collateral and to accommodate future margin loan calls.

Case study 2: Japanese Investment Company acquiring an alternative asset manager

In this transaction, Deutsche Bank was engaged with structuring an escrow to hold loan proceeds for a few months before the acquisition eventually closed. Deutsche Bank was also the lead lender and collateral agent for the loan financing on that transaction so the joint, one-stop service was appealing to the client parties. Deutsche Bank’s Corporate Trust team provided the documentation and held the proceeds across a mix of investments for safety and liquidity.

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