Acquisitions of China assets by US companies have plummeted to their lowest level since 2002, according to recent data from Dealogic reported by the Wall Street Journal (“WSJ”) MoneyBeat blog. The news that only 25 deals to buy Chinese assets were made by US companies in the first half of 2014 stands in stark contrast to what is seen as a booming overall global M&A market and one in which US companies are on the move. While US companies’ mergers and acquisitions volume is up 47% globally year-to-date (see WSJ MarketWatch article), US acquisitions in China have fallen over 70%, from nearly $2.3 billion in the first half of 2013 to a mere $611 million over the same period in 2014.

Does this mean that China is becoming less attractive to foreign investment despite the new leadership’s commitment to economic reform?

With the announcement of its new economic reform agenda last year at the Communist Party’s Third Plenum and subsequent developments, the administration of President Xi Jinping and Premier Li Keqiang, just one year into its term, has raised expectations for comprehensive economic reforms  that are intended to give the market a “decisive role” in the Chinese economy. The ambitious agenda includes policies to liberalize China’s financial markets, reform land and labor markets, restructure state-owned companies (SOEs), and cut red tape. (See further discussion of the proposed reforms by Covington & Burling’s Timothy Stratford here).

The government’s reform agenda is urgently needed, and its general contours have been welcomed by economists and the business community. The current leadership, aware of the shortcomings of the current investment-led economic growth model (perhaps most clearly demonstrated when the 2009 monetary and fiscal stimulus measures created an investment boom that was accompanied by a sharp rise in debt, particularly among local governments), is seeking to bite the bullet and execute a long-anticipated transition to a more consumption-led growth model. The new policy guidelines, in this regard, seek to tackle the heavy involvement of the state in the Chinese economy — no easy feat.

While the reforms make good economic sense in theory, the latest M&A figures along with a range of other quantitative and qualitative indicators suggest that multinational companies are beginning to look beyond China in the short-term while the country gets its restructuring act together. This reaction is potentially being further propelled by the political and regulatory tightening underway in China, which some interpret as setting the stage for the difficult economic reforms to come. This tightening is evidenced by a recent spate of high-profile anti-corruption and anti-trust enforcement actions.

The spike in anti-monopoly law enforcement actions against foreign companies has been of particular concern for the foreign business community in China. Government agencies enforcing China’s anti-monopoly law and other regulations have wide discretion over their interpretation and application, and are seen by some as using the law to support favored local companies and target foreign competitors. The lack of transparency and reliable channels to defend a company’s interests in such an enforcement action exacerbates foreign companies’ nervousness in the current climate. A statement from the European Chamber of Commerce on August 13, and a similar statement issued by AmCham today, both highlight these concerns.

As these and related concerns grow, companies appear to be increasingly cautious with respect to their engagements in the Chinese market. And those companies that are deepening or maintaining significant investments in China are becoming more sophisticated, paying renewed attention to the important role that public policy and government relations play in their China strategies.

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Photo of Yan Luo Yan Luo

Yan Luo advises clients on a broad range of regulatory matters in connection with data privacy and cybersecurity, antitrust and competition, as well as international trade laws in the United States, EU, and China.

Yan has significant experience assisting multinational companies navigating the…

Yan Luo advises clients on a broad range of regulatory matters in connection with data privacy and cybersecurity, antitrust and competition, as well as international trade laws in the United States, EU, and China.

Yan has significant experience assisting multinational companies navigating the rapidly-evolving Chinese cybersecurity and data privacy rules. Her work includes high-stakes compliance advice on strategic issues such as data localization and cross border data transfer, as well as data protection advice in the context of strategic transactions. She also advises leading Chinese technology companies on global data governance issues and on compliance matters in major jurisdictions such as the European Union and the United States.

Yan regularly contributes to the development of data privacy and cybersecurity rules and standards in China. She chairs Covington’s membership in two working groups of China’s National Information Security Standardization Technical Committee (“TC260”), and serves as an expert in China’s standard-setting group for Artificial Intelligence and Ethics.

Photo of Ashwin Kaja Ashwin Kaja

Ashwin Kaja is special counsel in the firm’s Beijing office and is a member of the firm’s International Trade, Public Policy, Data Privacy & Cybersecurity, and Anti-Corruption practice groups. He has advised multinational companies, governments, and other clients on a range of matters…

Ashwin Kaja is special counsel in the firm’s Beijing office and is a member of the firm’s International Trade, Public Policy, Data Privacy & Cybersecurity, and Anti-Corruption practice groups. He has advised multinational companies, governments, and other clients on a range of matters related to international trade, public policy and government affairs, data privacy, foreign investment, anti-corruption compliance and investigations, corporate law, real estate, and the globalization of higher education. He also serves as the China and India editor for Covington’s GlobalPolicyWatch.com. Mr. Kaja is also a certified information privacy professional (CIPP/US). Prior to joining the firm, Mr. Kaja was an associate at another major international law firm in Beijing.