Chinese-US M&A Deals Plummet

Trade tensions are just one aspect of deteriorating economic ties between the U.S. and China.

As a trade war between China and the US heats up, the value of completed Chinese mergerand acquisition(M&A) deals in the US fell 92% year over year compared to a 4% increase for Europe according to a report by law firm Baker McKenzie. The report reveals that in the first six months of 2017, the value of newly announced Chinese M&A deals in Europe was $22 billion, nine times more than the respective figure for North America ($2.5 billion). Meanwhile,the value of completed deals in Europe ($12 billion) was six times higher than North America’s($2 billion).

American business leaders’ appeals to the US government not to impose more tariffs on Chinese imports have been in vain—the Office of the US Trade Representativeis finalizing a $16 billion list of Chinese goods subject to a 25% levy. The US imposed $34 billion of tariffs on Chinese goods earlier this month, with China responding in kind. Unsurprisingly, this trade dispute has weighed on investors’ risk appetite.

“[The trade dispute with the US] is a very important factor since the US’s ultimate objective is to contain China in its move up the ladder,” said Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis. “A very logical way for China to react is to purchase technology abroad so as to facilitate China’s technological upgrade. Given the structural nature of US objectives, China will probably continue to target technology for its update for quite some time.”

The US-China trade war comes as eight Chinese M&A deals were cancelled in the US due to regulatory and political concerns (by contrast just three deals were cancelled in the whole of Europe over the same period) in the first half of 2018. Seven of these deals died due to unresolved concerns raised by the Committee on Foreign Investment in the United States (CFIUS), including the decision to block MoneyGram’s sale to Ant Financial on national security concerns in January.

More recently, CFIUS blocked a planned takeover of chipmaker Qualcomm by rival Broadcom, also on national security grounds. While Broadcom is based in Singapore, the fact that such a large deal involving an Asian buyer was scuppered will give Chinese investors pause for thought.

The winner of a US-China trade war may be ultimately be Europe and European companies.

Luigi Gambardella, president of ChinaEU—a business-led international association based in Brussels that focuses on the internet and telecoms sector—notes China’s increasing appetite for European technologies, specifically in areas such as 5G, artificial intelligence and blockchain.

Gambardella tells Global Finance that Chinese industries have a “strong desire” to move up the value chain for further improve their competitiveness. At the same time, Europe is in need of foreign investment to bolster these industries.

“Worsened China-US trade ties will have a negative impact on Chinese investors’ confidence in the US market and make Chinese companies look for safer places like Europe,” he added. Chinese investors already show more interest in Europe than the US and increasingly strained China-US trade ties will fuel that trend.

The question now is whether this trend will be reciprocal. As Europe continues its own trade conflict with the US, will Europe investor be driven further into China’s arms? This month’s EU-China summit in Beijing was telling. An EU that was once critical of China’s Belt and Road Initiative for its poor transparency and environmental protections now strikes an upbeat tone about the massive transnational infrastructure project.