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In recent years, due to geopolitical fluctuations, regulatory policies and other factors, the cross-border M&A market has faced numerous challenges, and the number of China-related cross-border M&A deals has shown a downward trend. However, in sectors such as semiconductors, electronic devices, information technology and healthcare, the scale of China’s M&A market remains considerable.

Outbound acquisitions

The most popular industries for Chinese enterprises investing abroad include advanced manufacturing and transportation, TMT, and mining and metals. Among these, the preference for high-tech sector M&As reflects China’s emphasis on developing new quality productive forces.

In terms of geographic distribution of deals, Asia has remained the top region for outbound M&A transaction volume by Chinese enterprises for consecutive years, while regions such as Africa, Japan, South Korea, India and Brazil have also shown growth. In contrast, North America has seen its lowest M&A value and volume in the past decade. Chinese enterprises conducting outbound M&A must comply with a series of domestic and foreign regulatory requirements, usually including but not limited to:

(1) China’s outbound direct investment (ODI) procedures. Depending on factors such as investment amount and whether the target involves sensitive countries or regions, Chinese enterprises need to complete ODI filing or registration procedures with the Ministry of Commerce, the National Development and Reform Commission and the foreign exchange authority before completing investments. Even if a Chinese enterprise uses offshore funds, it is not necessarily exempt from ODI procedures.

(2) Foreign investment procedures in the host country. To legally hold interests in a target company, Chinese enterprises must comply with the host country’s foreign investment requirements.

(3) National security review. Certain M&A transactions may be deemed by the host country as potentially affecting its national security and thus subject to additional national security reviews, such as filings with the Committee on Foreign Investment in the US.

(4) Antitrust filing procedures. Relevant parties should complete antitrust filing obligations of relevant jurisdictions if the transaction structure and turnover of the involved parties trigger relevant filing thresholds.

The completion of the above-mentioned regulatory procedures is usually considered as closing conditions in outbound M&A transaction documents.

In the current context of intensifying geopolitical tensions, mitigating or managing trade sanctions risks has become a key consideration for Chinese companies when planning M&A transactions. Such companies should remain attentive to the latest trade control and tariff policies of various countries. They should also adopt or develop trade compliance and export control regimes to ensure that the contemplated M&A transactions achieve both business and compliance objectives. Transaction parties should also pay close attention to the uncertainties arising from the global political situation affecting cross-border M&A completion.

In addition, due to uncertainties arising from domestic and foreign governmental approvals, foreign counterparties are placing greater value on measures that enhance deal certainty, such as reverse breakup fees and deal deposits. However, Chinese parties must consider the PRC foreign exchange control requirements when assessing the feasibility of such mechanisms during negotiations. State-owned enterprises must further consider tasks to preserve and increase the value of state-owned assets when designing such arrangements. Moreover, exchange rate fluctuations caused by international financial market volatility can impact transaction costs for both parties, prompting Chinese enterprises to increasingly hedge foreign exchange risks through currency-locking arrangements.

Inbound acquisitions

Due to geopolitical and other factors, there has been a significant year-on-year decrease in both the volume and value of foreign M&A transactions. Foreign investors are becoming increasingly cautious, for example, shifting their investment approach from acquiring controlling stakes through M&A to forming joint ventures. In terms of industries, the top three sectors for foreign capital utilisation are manufacturing, scientific research and technical services, and leasing and business services.

In terms of funding sources, US capital is increasingly constrained, while Europe, the Middle East and Africa have become the major sources of cross-border M&A funding. For foreign investment involving Chinese targets, special attention should be paid to the following regulatory requirements:

(1) Foreign investment access; negative list. Since joining the WTO, China has granted national treatment to foreign investors in areas outside the negative list while restricting foreign investment in sectors within this list. Currently, restricted sectors include sensitive industries such as agriculture, education and telecommunications, as well as sensitive fields such as human stem cells. In recent years, China has continued to expand its openness. Several policies have recently been introduced to further open restricted sectors such as healthcare and telecommunications in certain pilot zones, providing policy space for foreign investors to explore new business models in China.

(2) National security review. For investments involving the defence industry or sectors critical to national security, parties may be subject to the PRC national security review regime before completing relevant deals. If a transaction is completed without obtaining relevant clearance, competent authorities may revoke the transaction or order divestiture.

(3) Antitrust. The newly amended Anti-Monopoly Law and other related regulations have raised the filing thresholds for turnover, but also impose stricter liability and consequences for unlawful concentrations.

(4) Data compliance. If the target industry involves the acquisition, processing or transmission of personal information or important data, pay attention to compliance obligations under laws such as the Personal Information Protection Law and the Data Security Law.

Similar to outbound M&As by Chinese enterprises, foreign investments in China are also affected by geopolitical risks. For example, the US rules restricting US persons, entities and their foreign branches from investing in semiconductors and microelectronics, quantum information technology and artificial intelligence in China have caused some US enterprises and individuals to delay or even cancel investment plans. Therefore, foreign investors must also pay attention to applicable trade control and sanction rules when conducting M&A transactions in China.

For risk control purposes, parties may consider incorporating deal certainty-enhancing measures into transaction documents. On the other hand, since investment returns from China – such as dividends and capital gains from equity transfers – are subject to foreign exchange rules and require specific registration and tax procedures, foreign investors typically pay close attention to viable exit paths and capital repatriation channels. In practice, equity transfers or exits following the target company’ IPO of the target are commonly used exit strategies.

China has also recently introduced policies to further facilitate foreign investors’ exits and other operations. In addition, with the 2024 revision of the Company Law adjusting corporate governance structures, reinforcing capital adequacy and maintenance principles, and tightening director obligations (including those of foreign directors), foreign investors should consider these changes when structuring M&A deals and subsequent corporate governance arrangements.

Policy changes

As IPO reviews in China grow more stringent, M&A has become an increasingly important exit route in the capital markets.

For foreign investors, the newly revised Administrative Measures for Strategic Investment in Listed Companies by Foreign Investors (2024), effective as of December 2024, further expand foreign access to China’s securities market. The measures permit foreign investors to use shares of overseas non-listed companies as a consideration in strategic investments in listed companies, whether through private placements or tender offers. Approval from the Ministry of Commerce is no longer required for such transactions, effectively lifting previous restrictions on cross-border share swaps involving foreign investors using overseas non-listed equity.

Following the implementation of these new rules, Shenzhen Original Advanced Compounds announced a plan to acquire 99.97% equity interest in AAMI (an overseas non-listed company) through a combination of cash, newly issued shares and other means, marking the first A-share cross-border share swap case under the measures.

In addition, following the China Securities Regulatory Commission’s release of the Six Measures on M&A Restructuring last year, the commission has recently revised the Administrative Measures for the Material Asset Restructuring of Listed Companies. The revisions introduce favourable provisions such as shortened lock-up periods for specific shareholders, a simplified review process and mechanisms for instalment payments of consideration in restructuring transactions. These changes facilitate participation by listed companies in cross-border M&A – including the use of share issuance as a financing tool – and merit close attention from both domestic and foreign enterprises and investors.

The scope and depth of outbound investment and M&A continue to grow. However, given the complex and ever-changing international geo-political landscape, foreign particip-ation in domestic M&A transactions in China is likely to remain cautious in the short term.