James Kynge China’s overseas acquisition spree, which surged to a record in 2016 before slumping in the first few months of this year, appears to be picking up strength again as state-owned companies stage a comeback while their private peers fall away. 

A new study by Rhodium Group, a consultancy, shows that the number of overseas M&A deals announced by Chinese acquirers rose strongly in May and June after hitting low levels in February, March and April following the imposition of capital controls at the end of 2016 (see chart). “Following Chinese regulators crackdown on ‘irrational’ outbound foreign direct investment in November and December of 2016, new deal activity slowed sharply,” wrote Thilo Hanemann, director at Rhodium Group, in a report. “However, data points from recent weeks indicates that the decline in the number of outbound M&A transactions has reversed,” he added. The number of Chinese acquisitions valued at more than $5m announced during May and June came to 44, compared to just 29 in February, March and April. The valuation of deals have also risen — with $28.6bn in deals announced in the second quarter, up from $16.6bn in the first quarter, according to Rhodium data.

Henry Tillman, chief executive of Grisons Peak, a London-based investment bank, said the recovery in deal flow was coming mainly in specific areas. “This is a recovery but it is one in directed industries such as logistics and in areas related to the One Belt One Road project,” he said. One Belt One Road is the name given to a grand plan led by Xi Jinping, the president, to build infrastructure and boost trade between China and 65 countries in Asia, the Middle East, Africa and Europe. The recovery also corresponds with other signals that capital controls are being eased somewhat. In April, sources said China had scrapped a restriction which stipulated that financial institutions had to maintain either a net balance or net inflows of renminbi across its borders. Nevertheless, several other measures remain in force, including tighter approvals for foreign acquisitions, stricter rules on purchases of foreign exchange and limits on cross-border renminbi remittances. The distribution of the recent upsurge in dealmaking is uneven. The action has been heavily skewed toward the state-owned sector while private Chinese companies have been left largely out in the cold. The value of announced overseas acquisition deals by private companies totalled $4bn in the first half of the year, compared with $17.5bn in deals by state-owned companies, the Rhodium data show. This mismatch follows a number of failed transactions by private acquirers such as Dalian Wanda’s planned $1bn purchase of US TV production company, Dick Clark Productions, which fell apart in March. Wang Jianlin, chairman of Wanda, told the Financial Times in April that a change in policies in China were behind the deal’s failure. The collapse of a $2bn acquisition by LeEco of US TV manufacturer, Vizio, in April was also blamed on “regulatory headwinds”. Rhodium’s data reveal that most of the casualties of the regulatory squeeze are private companies, leaving the field more open to state-owned peers that enjoy stronger connections within China’s government. Five of the top 12 deals in the first half of the year were by the state-owned stalwarts State Grid, Sinopec, Three Gorges, Shandong Gold and Yancoal. CIC, China’s sovereign wealth fund, snagged the biggest deal so far this year, agreeing to buy Logicor, a pan-European logistics company, from Blackstone for €12.25bn in June. It was the fourth-largest Chinese international takeover to date. “While the State Council has recently tightened risk control measures for outbound investment by state-owned companies, it seems that experienced sovereign and state-owned investors are better able to navigate the current political environment to get capital out of China,” said Mr Hanemann. But even though state-owned companies appear set to capitalise on a more permissive approval regime in the second half of this year, it is unlikely that approvals will surge back to anything like the levels of last year. Beijing remains concerned about capital outflows and is therefore unlikely to throw caution to the winds.