China 2015: The Economy is Still Slowing Down

Published:2015-12-30    Source:华然咨询

The GDP growth rate has been declining since 2012. In the first 3 quarters of 2015, the GDP growth rate dropped from what is 7.3% in 2014 to 6.9%. According to the latest official economy indexes of November 2015, particularly the indexes of Industrial/Investment are significantly lower than expectation. The growth of Industrial Added Value is only 6.2%, while the PMI Index has been lower than 50 for the last 4 months. The Chinese government officially announced that the expected GDP growth rate of 2015 should fall down to 6.8%. Now, China has entered from High-Speed Development Era (GDP Growth Rate > 9%) to Normal-Speed Development Era (7%> GDP Growth Rate > 5%) and may maintain at this Normal-Speed for the next decade.

Source: National Bureau of Statistics of PRC

GDP Structure 

"Made in China 2025" Plan is Officially Announced

On 19th May 2015, the Chinese Prime Minister Mr. Li Keqiang approved and signed the "Made in China 2025" Plan. This will be the action programme for China to implement the manufacturing strategy for the next decade.

 

"Made in China 2025" Plan targets at 10 key sectors to promote the development of our strength and strategic industries. The 10 key sectors are New Information Technology, Numerical Control Tools & Robotics, Aerospace Equipment, Ocean Engineering Equipment & High-Tech Ships, Railway Equipment, Energy Saving & New Energy Vehicles, Power Equipment, New Materials, Biological Medicine & Medical Devices, and Agricultural Machinery.

 

We can predict that the Chinese enterprises will inject significant investments and make numerous overseas M&A transactions in the sectors above in order to penetrate into the market and innovate. 

 

The Impact of "One Belt and One Road" 

"One Belt and One Road" refers to the "Silk Road Economic Belt" and the "21st Century Maritime Silk Road". "One Belt and One Road" is neither an entity nor a mechanism; it is a conception and announcement of regional collaborative platform. "One Belt and One Road" will fully utilize the bilateral and multilateral mechanism between China and relevant countries to establish an efficient cooperation platform. "One Belt and One Road" impenetrate the Eurasia and link the Asia-Pacific Economy Circle with the European Economy Circle. In our history, Silk Road and the Maritime Silk Road has been the major channels for business and culture between China and countries in Middle Asia, Southeast Asia, South Asia, West Asia, East Africa and Europe. 

 

"One Belt and One Road" involves 65 countries and covers about 5,539 km2, about 41.3%of the surface of the earth. There are more than 4.6 billion people live in the "One Belt and One Road" countries. The total GDP reaches USD 27.4 trillion, accounting for 38.2% of the global economy. In the future, "One Belt and One Road" shall lead the overall international cooperation and significantly influence the landscape of global economy.

 

Generally speaking, the infrastructures of the "One Belt and One Road" counties are yet to be developed, which is the bottleneck of the trade development. Ports, highways, railways, airports, tunnels and information communication will be the priorities for the development and upgrades in the future. This series of demand upon the infrastructure shall covert into the massive amount of investment in the infrastructure in the near future. At that time, China can fill in the market with its experience in infrastructure and digest its surplus in production of steel, cement, etc…

 

With the implementation of "One Belt and One Road" strategy, the countries will gradually lift the trade barrier and promote the international trade mutually, exploring the trade potentials at the highest level. Eventually, the unification of the Asian economy will be formed. The unification will leverage the communication, trading and investment among the "One Belt and One Road" countries and improve the economics performance of all the participants.

 

As a supplementary measurement of the "One Belt and One Road" strategy, China led the Asian countries to form the Asian Infrastructure Investment Bank (AIIB). The purpose of founding AIIB is to promote the regional infrastructure and economics unification, furthermore, to strengthen all forms of collaboration between China and other Asian countries. The primary investment area includes Energy, Transportation, Rural Development, Urban Development and Logistics. By now, there are 57 countries have joined AIIB, which headquartered in Beijing.

 

 

Internationalization of Chinese Yuan 

On 30th Nov 2015, International Monetary Fund (IMF) announced that the Chinese Yuan (CNY/RMB) will be concluded as the fifth currency in the Special Drawing Right (SDR) basket, sequential to British Pound, Euro, Japanese Yen and US Dollar. This is was a milestone for the internationalization of CNY, indicating CNY can be the major deposit currency globally. Soon after, IMF confirmed that the weight of CNY is 10.92% in the SDR basket, exceeding British Pound and Japanese Yen. This is a strong signal as the recognition of the Chinese economy in the last 37 years since the Reform and Opening Up, as well as the beginning of the new era of Chinese economy.

 

Currently, CNY is adopted as the payment and settlement currency among some Asian countries. While the "One Belt and One Road" brings the trading opportunities to the neighbor countries of China, it also injects the new dynamics for the internationalization of CNY. It is widely accepted that, the CNY will be adopted by more Asian countries even some European countries.

 

M&A Transactions Climbs to a New Height In China

As China is now the second largest economy in the world, there are leading players in each industry. With the maturing capital market and flourishing intermediary platforms, cross border transaction is becoming an option for Chinese enterprises in terms of business development. Under the circumstance of the economic transformation, the Chinese government also supports the domestic enterprises to restructure or internationalize via cross border transactions.

 

In the 1st half of 2015, as 4,559 transactions were closed, more than USD 352 billion is involved in the M&A transaction in China Mainland, which increased 57% than what of the 2nd half of 2014. We can expect that the amount of transaction and capital involved shall reach a new height in 2015 in China.

 

Numbers of Deals and Value of M&A Transactions within China

 

 

Source: THOMSON REUTERS, PWC

 

Outbound M&A Activities Speed Up

In Finance, Mechanical, Construction, Chemistry, Automotive and other sectors, some Chinese giants have the capability to precede a cross border M&A transaction. Meanwhile, the Chinese local financial advisors are rising up to provide comprehensive cross border M&A advisory services and financing approaches with the support of Silk Road Foundation, AIIB, Bank of BRICS and other policy banks. These objective conditions are helping the Chinese enterprises to speed up their cross border M&A activities.

 

Numbers of Deals and Value of Outbound M&A Transactions from China

Source: THOMSON REUTERS, PWC

 

For the 1st half of 2015, 174 of cross border transactions were closed, which was 17% higher than what of the 2nd half of 2014. In addition, private companies played an important role during the period. Transactions involved private companies increased 50% while the monetary value increased 148% than what in the 2nd half of 2014.

 

 

Source: THOMSON REUTERS, PWC

 

The landscape of cross border for Chinese enterprises is changing. In the past decade, the proportion of transactions involving energy and natural resource has been declining. By contrast, industrial goods, high-tech, consuming goods and financial services has been souring up for the last 3 years. According to the research of BCG and our analysis, only 20% of outbound transactions were aiming at acquiring energy and other strategic natural resources, while more than 75% of transaction were targeting at the technology, brands and foreign markets in the last five years.

 

Nowadays, the major players for outbound M&A activities are shifting from large State Owned Enterprises to private enterprises and financial investors. Private enterprises and financial investors prefer to invest in the brands and technologies in the mature markets such as North Americas and Western Europeans. Therefore, North Americas and Western Europeans are the core markets for outbound investment by now. However, with the implementation of "One Belt and One Road", the target market of outbound M&A may gradually switch to Mid-Asia, Southeast Asia, Eastern Europeans and other countries along the route.

 

 

Source: THOMSON REUTERS, PWC

 

After years of high growth, the Chinese economy has entered into a Normal-Speed Development Era (7%> GDP Growth > 5%). With the maturity of traditional industrial giants and rising of the high tech enterprises, M&A transactions will stay active. Outbound transaction is now a reasonable option as an approach of global business development for Chinese enterprises. Shanghai Huaran Consulting will carry on assisting the Chinese enterprises to set up and implement M&A strategies and realize the internationalization of Chinese enterprises.