China's M&A market hits record high as domestic comes into focus

The number of Chinese mergers and acquisitions in the first half of 2021 hit a record high.

Domestic M&A and private equity and venture capital activity both performed strongly, according to PwC.

China's domestic M&A market surged 11 percent to 6,177 transactions in the first half.

"It was driven by strong domestic strategic M&A, which rocketed by 41 percent, and robust PE deal activity," said Jenny Chong, PwC's Asia Pacific International Tax Services Leader.

"But there was some relative slowing in the second quarter with some caution around market uncertainties."

Deal value, worth US$312.1 billion, fell 29 percent from their spike in the second half of 2020, returning to more normal levels, "due to much fewer one-off state-sponsored and private-sector mega-deals," Chong said.

There were 45 mega-deals (over US$1 billion) in the first half of 2021, 10 less than the previous Half-year period.

Many were aligned with key domestic economic themes such as industrial upgrade (12 deals worth US$22 billion), dual-circulation (nine deals with US$25 billion), and Environmental, Social, and Governance (five deals of US$16.5 billion).

China's focus on its domestic economy and rapid rebound from the COVID-19 pandemic drove domestic M&A volumes to their highest levels since the first half of 2018.

Cross-border inbound activities, in contrast, were adversely affected by the pandemic-related travel restrictions. In terms of deal volume, the increase was driven mainly by industrial upgrades, technology and consumer sectors although activities in nearly all sectors witnessed an increase.

PE activity, meanwhile, remained strong but moderated from the record levels hit in the second half of 2020, with fewer mega-deals in the more recent period. Technology, consumer and industrial sectors continued to attract the most capital overall, while the highest volume sectors were again high tech, health care, industrial and consumer.

PE-backed IPO activity continued to be vigorous in the first half with the Shanghai STAR Market remaining very active.

China M&A is likely to continue to have a domestic theme in the second half, supported by the "dual circulation", "industrial upgrade" programs and state-owned enterprises reforms, PwC predicted, as many companies continue to revisit their operating models and strategies and will need capital to reconfigure their businesses leading to transactional activity. 

It expected activity to stay strong in the second half, as "the PE industry is well placed to respond to the demand for equity capital, and the overall liquidity is still high."

"The effects of COVID-19 and other uncertainties around trade and geopolitical relations will continue to impact both domestic and cross-border M&A activity in the second half, which may lead to some small decline, albeit both domestic strategic and PE/VC activity will likely remain robust overall," said Andrew Li, M&A advisory central leader of PwC China.