Market Spotlight: What’s next for China’s economy in H2 2021?

By Desmond Chua, Head of Region, APAC, Datasite

Being the first country to feel the severe impact of the pandemic, China was also the first major economy to emerge on the other side. According to the IMF, the country’s GDP grew at 2.3% last year—a far cry from the 3.3% contraction experienced globally and the 5% contraction in the G7 countries.

After such a strong recovery, it was inevitable that the pace of growth would slow.  Q1 of this year saw an 18.3% expansion compared to the same period the previous year, but in the second quarter, this moderated to a 7.9% YoY growth rate.

However, according to Mergermarket’s Intelligence Heat Chart in the recently published Deal Drivers APAC HY 2021 report, geographical analysis suggests China is set to again dominate M&A activity during the second half of the year. The Greater China region, now in post-pandemic recovery mode, accounted for almost 1,600 companies-for-sale stories in H1 2021, and Chinese targets featured prominently in every single industry sector.

At a crossroads in domestic economics

Potential areas holding back growth include rising commodity prices and a high level of corporate debt.

Data shows that China’s producer price index—which measures inflation from the perspective of producers—rose by 9% YoY in May. This is the steepest rise in the price index in over a decade and could lead to lower exports, even as domestic consumption remains sluggish.

Meanwhile, there have been a record number of corporate bond defaults this year. In recent years, risky debt has ballooned among Chinese corporations, including state-owned enterprises (SOE). While the central government has made it a priority to reduce the level of debt, this is the first sign that it did not step in to rescue troubled regional SOEs.

Complications in international relations

The prospect of China’s economic growth in the near future is further complicated by continued tensions with the US and the regulatory crackdowns on foreign investment in Chinese companies. A new government directive to review listings of companies holding huge amounts of user data caused sharp drops in the share prices of overseas-listed Chinese tech firms. Chinese ride-hailing app, Didi Chuxing, lost 20% of its value in one week after listing on the New York stock exchange when the government announced it would investigate the company as part of a review of overseas listings.

Expert insights from the mid-year IPO review webinar that Datasite co-hosted with Dealogic and Toppan Merrill, noted that any Internet companies sitting on personal data of over 1m users would be the focus of such scrutiny.

Additional volatility was caused by the announcement of a ban on foreign investment in education firms. Education businesses were also banned from listing abroad via variable interest entity (VIE) structures, the popular way Chinese firms are able to list abroad.

Although foreign investors can expect to experience further difficulty in Chinese markets in the coming months, the new regulations for various sectors of the economy could bring longer-term stability. For instance, VIEs are not officially sanctioned by Chinese regulators and operate in a legal grey area. While reforms to the system may be painful, regulatory changes could, in fact, bring greater certainty to this large yet legally murky market.