China Perspective: Potential for a Thaw

Recent shifts in the dynamic between the U.S. and China could have far-reaching implications for global business and politics.

Here, Daniel Wang, head of Asia-Pacific for Harris Williams, discusses the most important takeaways for M&A.

A Warmer Tone & Continued Challenges

While China’s social and news media outlets have been very negative on U.S.-China relations, their tone leading up to and following the Asia-Pacific Economic Cooperation (APEC) Leaders’ Week 2023 has been warmer, suggesting a desire from the Chinese to improve relations. TV programs in China preceding the meeting traced the history of U.S.-China relations, focusing on positive aspects of that relationship.

Likewise, conversations at APEC indicate that tensions over Taiwan are easing somewhat. Xi did not suggest China is preparing for an invasion of Taiwan, while Biden’s reiteration of the One China policy at the meeting helped further de-escalate the issue. However, Taiwan’s presidential election will be early next year, and its outcome could change this dynamic.

At the Global Financial Leaders’ Investment Summit in Hong Kong, CEOs of global banks, private equity groups, hedge funds, asset managers, and others reiterated the importance of China for their respective businesses. They were also critical of the challenges that China has imposed on foreign entities trying to do business in the mainland and in Hong Kong.

Despite these shifts, we are unlikely to see drastic overnight changes in cross-border M&A between the two countries, which is at a 17-year low. During the first 9 months of 2023, there was around $220 million of M&A investment from China into the U.S. versus $3.4 billion for the same period in 2022. China spent more than $200 billion in global outbound M&A in 2016, $54 billion in 2019, and only $12 billion for the first 9 months of 2023. This slowdown has been driven mostly by COVID-19, but also by Xi’s “inward” economic approach as compared to his predecessors. This approach is also evidenced by a sharp acceleration of domestic M&A within China, worth $27 billion as of Q3 2023.¹

The most opportunity will be in areas where CFIUS is less of a consideration: subsectors within consumer and healthcare, for example. M&A between China and Europe will also provide opportunities, especially in advanced materials and technology and in new energy sectors.

Conclusion

While recent positive dialog between the U.S. and China suggests thawing relations, much more will need to be done to foster a significant rebound of Chinese participation in U.S. M&A. In the meantime, select sectors and businesses — especially where CFIUS is not a concern — will still garner Chinese buyer interest.

To discuss these dynamics in more detail, please contact Daniel Wang.

1. The Financial Times: Chinese deal activity in U.S. slumps to lowest level in 17 years; August 4, 2023.