China caution suppresses capital markets rebound in APAC 

LSEG Deals Intelligence experts Elaine Tan, senior manager for Deals Intelligence in APAC, and Daniel Stanton, Editor of IFR Asia, recently led a client webinar Exploring Deal Making Trends in Asia, based on our data to the end of July 2024. 

Structural and cyclical constraints, particularly in China, mean APAC has largely missed out on the wider global recovery in capital markets in the first seven months of 2024. Increasing protectionism, geo-political concerns and an economic slowdown have affected most countries in the region, although there have also been unexpected beneficiaries. Here are the highlights….

• Target China M&A falls 27%, even as occidental markets grow
• Indian & regional IPOs benefit as US tech stocks deflate
• Improvement in bond issuance fails to halt fee-income shrinkage

Asia-Pacific has failed to participate in the wider M&A recovery so far this year. A renaissance in announced takeovers in the first seven months of 2024, largely driven by US domestic mega deals, has pushed global activity up 16%. By contrast, Asia-Pacific M&A has fallen 18% to reach just $282bn, the region’s lowest M&A tally in more than a decade.

The decline is largely a function of weakness involving China, where announced M&A fell 23% year-on-year, at a time where most other global regions saw double-digit growth. 

The country’s economic slow-down, combined with geo-political instability and heightened regulatory scrutiny saw M&A with any Chinese involvement fall to a 12-year low of just $133bn, almost a quarter down on the same period last year. When it comes to cross-border deals, China did not even make the global top-ten, amid a climate of more aggressive national security, anti-trust and protectionist measures across the world.

The China slowdown has proved somewhat contagious in the region, with Australian M&A falling 22% and Japanese M&A down 10% compared with the first seven months of 2023. Meanwhile South-East Asia countries saw a 14% fall in M&A activity. 

By deal size, only those in the $1-5bn range saw an uptick. By contrast, smaller deals and mega-deals were both down. Of the latter, just four have been announced so far this year. 

However, the region also saw significant bright spots. Indian M&A increased by 1.1%, while Japan was the fourth most active country in the world for cross-border deals. Japanese corporations were particularly active in Southeast Asia, with Singapore targets companies accounting for the majority of Japan’s outbound activity, followed by Thailand and Malaysia. 

A drive towards infrastructure and communications build-up in several southeast Asian countries saw M&A in related sectors gain ground. For instance, the second largest deal in APAC so far this year was the $6.5bn buyout of Thailand Advanced Info Service.

Meanwhile positive sentiment around consumers also led to an uptick in retail-related M&A, including the region’s largest announced transaction – the $8.3bn buyout of China’s Dalian Xindameng Commercial Management. 

Although private equity firms have been behind some of the region’s largest deals so far this year, pushing up the aggregate value of buyouts to $58bn and taking their share of the total M&A pie to 21%, the number of financial sponsor-backed transactions fell 45% to the lowest level since 2020. Chinese companies accounted for 42% of all buyout activity in the APAC, representing an aggregate value of $24bn. Anecdotally, private equity fundraising in the region remains high, suggesting a strong continued presence for such investors in the year ahead.

It has been a similar story of retreat for APAC’s equity capital markets, where proceeds have fallen by almost a third, compared with the first seven months of 2023, brought down in particular by inactivity in China offshore equity. 

At the turn of this decade, Greater China accounted for more than two-thirds of the region’s equity issuance – today it is closer to one-third. The Chinese IPO market has also been quiet, as part of what appears to be a deliberately elongated approval process for A shares, to support secondary prices. 

Sentiment elsewhere is also fading, such as Taiwan’s AI driven equity boom, which appears to be coming off the boil. Indonesia, for a while one of the region’s most active IPO markets, with a string of electric vehicle related companies, has also seen enthusiasm wane, following reports of declining EV orders internationally. 

By contrast, India offers a very promising equity story, with a string of major technology corporations reshoring or – in the lingo – ‘reverse flipping’ their stock-market listings from places such as the US and Singapore, as depressed valuations in overseas markets are resulting in a convergence that makes domestic markets relatively attractive. 

Other promising developments include a liberalisation of trading rules in South Korea and Japan that appear to be unlocking value and liquidity. However, South Korea has also made block trading more complex via more onerous transparency rules. 

G3 Bond issuance in APAC (excluding Japan) has rebounded 27% so far this year, from the low-bar set in 2023, to reach $49bn. China issuers are staying at home to take advantage of low-cost renminbi-based debt. As a result, Greater China issuance grew 28% in first seven months of this year, to $49bn, although this represents just a third of that raised in the same period in 2019.

High-yield bonds, which were particularly quiet last year, remains difficult in China, although there are signs that Macau casinos are starting to fill the space vacated by property developers, as well as growing interest from India issuers. High yield issuance has surpassed $7bn, already eclipsing 2023’s full-year total of $5.5bn.

Elsewhere, the Australian dollar is proving an increasingly popular choice for the region’s borrowers, with Nestle and the Canadian provinces raising in Ozzie, while eschewing sterling and Canadian dollars. 

Unsurprisingly, investment banking fees in APAC were down almost a quarter in the first half of 2024, to reach just $9bn, the lowest level of income since 2017. Fees relating to bond issuance ticked down 4% to $5.6bn, while equity underwriting income plummeted by more than half to $1.6bn. Advisory fees on M&A transactions fell by a quarter and failed to reach the billion-dollar mark. Meanwhile, China remains the biggest the investment banking market in the region, with 60% wallet share, and the second largest market globally.