Fears of Asia crash as mergers and acquisitions go cold

Mergers and acquisitions across Asia are on the decline, sparking fears of a potential economic downturn.

Goldman Sachs recently decided to fire at least 25 investment bankers across its Asian markets department, according to sources familiar with the matter.

The Wall Street giant has been planning a series of job cuts since the start of the pandemic, with the company looking to shed up to one thousand roles starting this month.

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Goldman’s Asian layoffs come after the bank went on a hiring spree throughout China and Hong Kong last year following news that the second largest economy in the world had opened its financial market to foreign asset managers and brokerages.

However, this boom turned out to be short-lived, as dealmaking across Asia seems to have ground to a halt.

China Regulatory Trends That Affect MA in 2022 e1663723325879

Global banks in Asia are now under pressure to cut costs, with equity offerings in Asia have fallen by 50%, down to $236.6 billion, the lowest half-year seen since 2014.

“There is little prospect of a significant rebound in the short term,” said David Brown, PwC deals leader for the Asia-Pacific region.

“If some adverse factors – such as COVID, weak stock markets and regulatory and geopolitical concerns – can start to ease, investor confidence will gradually recover.”

Why Chinese M&A activity dried up

The biggest merger and acquisition (M&A) transactions from earlier this year were mainly among state-owned enterprises.

However, a PwC report from August said that some big companies were holding off transactions due to this being a politically sensitive year as Chinese President Xi Jinping strives for a third term at a coming CCP congress later this year.

“It is much more difficult for startups in China to raise funds from venture capital,” Brown added.

“So, if you go out into the market now… specifically to raise funds for China, our understanding is that is not necessarily getting a good reception.”

At the same time, China’s crackdown on its tech sector, strict virus measures, and a crumbling property market are all weighing on the M&A sector.

Going forward, rising inflation and central bank interest rates also hurt M&A markets.

In such environments, debt financing acquisitions become more expensive, while inflation can lower real returns on investments.  

China GDP

In a typical M&A cycle, deal volumes and values rise and fall in line with the overall market sentiments.

Company management and directors hesitate to make big investments when economies are showing weakness.

That’s definitely the case with China right now, where new data from Citi Group showed the number of distressed mortgages in China reached a new all-time high.

Bloomberg recently stated that China could see an economic slowdown even worse than in 2020.

Growth projects for China have steadily fallen from 5.5% in March now to just 3.5%. Jian Chang, Barclay’s chief China economist, lowered her full-year growth forecast to just 2.6%.