China's mergers and acquisitions market increases with domestic focus

China's mergers and acquisitions market is expected to be increasingly dominated by domestic deals, while also seeing overseas M&A booming in 2023, PwC said.

"We expect announced deals to continue to decline in the first half of 2023, due to the exceptionally soft conditions for deal processes last year," said Jenny Chong, PwC China Asia Pacific International Tax Services Leader.

"However, recent government measures to stimulate investment, along with the removal of COVID-19 restrictions, will have a positive influence on M&A. We believe investor confidence will gradually recover as public market valuations improve."

They noted some positive signs for 2023, including the release of pent-up demand with the removal of COVID-19 restrictions, measures from China's leadership to address the real estate crisis, relaxation of curbs on the Internet economy, and a re-prioritization of economic growth.

Recent government measures to stimulate investment, along with the removal of COVID-19 restrictions, will have a positive influence on M&A. We believe investor confidence will gradually recover as public market valuations improve.

Jenny Chong, PwC China Asia Pacific International Tax Services Leader

Ongoing record levels of "dry powder" and pressure to deploy this capital should also lead to more active M&A markets in 2023, it said.

The economic dislocations associated with COVID-19 and geopolitical trends will also give rise to transactional and transformational activity, including related to distressed situations.

"We expect to see some improvement as China's post-COVID reopening starts to take effect," said Andrew Li, PwC China Central Deals Leader. "But it will be rather cautious and gradual, with a few stops and starts due to the various uncertainties in play.

"As a result, we think that the M&A market in China will become even more domestically orientated, at least in the short term. We also expect to see increased demand for outbound investment, especially into the Asia-Pacific region."

They forecast the full-year 2023 M&A figures to be close to last year's, with activity being likely to be weaker in the first half but stronger in the second.

Last year, China M&A fell to its lowest level since 2014 at US$486 billion, down 20 percent compared with 2021. The decline would have been larger if not for some large transactions to reform state-owned enterprises, according to its research.

We think that the M&A market in China will become even more domestically orientated, at least in the short term. We also expect to see increased demand for outbound investment, especially into the Asia-Pacific region.

Andrew Li, PwC China Central Deals Leader

One indicator of the soft market conditions was the fall in mega-deals (greater than US$1 billion) to nearly half the long-term annual average. There were only 54 such mega-deals in 2022, against 97 in 2021, with 35 of these related to SOE reform – compared with 22 the previous year.

But on the plus side, China is playing an increasingly important role in global M&A markets, with its number of transactions and the total trading value respectively accounting for 22 percent and 15 percent of those in global markets.

Outbound M&A activity continued to be moribund last year, as travel restrictions and geopolitical issues affected both the ability and confidence to pursue large outbound transactions.

Analysis by sector shows that China has strong investment interest in energy and power, high technology and health care.

In volume terms, deals have still been happening in the US and Europe, but these have been small, and therefore less likely to receive regulatory attention.

Asia became the second most popular destination for outbound investments in 2022.