HONG KONG/BEIJING, Sept 30 (Reuters) – Dealmakers in Asia are betting a possible retreat of multinational companies operating in China and a rise in acquisitions in India and Southeast Asia will replenish the M&A pipeline, amid macroeconomic headwinds.

Merger and acquisition (M&A) transaction values involving China plunged by 35% year-on-year to $266 billion in the first nine months of the year, to the lowest level since 2013, Refinitiv data showed, though it remained Asia’s largest deals market.

M&A value was down 35% worldwide and 36% for deals involving Asia in the same period, according to Refinitiv, with the Russia-Ukraine war and global interest rate hikes causing financing costs to rise and currencies to wobble, making dealmaking challenging.

China’s outlook is further clouded by the country’s strict COVID-19 curbs as well as uncertainties over its policy direction ahead of next month’s leadership reshuffle by the ruling Communist Party, bankers and lawyers said.

“A major uncertainty affecting the 2023 outlook for China-involved M&A activity is where China’s zero-COVID policy is heading, which currently lacks a clear signal,” said Jeffrey Wang, partner and co-head of the Shanghai office of investment banking adviser BDA Partners.

Alan Wang, a Shanghai-based partner at law firm Freshfields Bruckhaus Deringer, said the level of market activity in China would likely remain subdued until after the first quarter next year given the uncertain domestic and global economic outlook.

“Right now, people don’t know if we hit the bottom yet,” he said. “If you were the seller, you probably wouldn’t be willing to sell because you think that there should be prospects for an improved valuation in the not-too-distant future.”

Strategic sectors including semiconductors, artificial intelligence, healthcare and new energy vehicles are likely to be among the most popular sources of deals involving Chinese companies, the bankers and lawyers added.

BEYOND CHINA

Private equity firms, the region’s major deal driver with over $500 billion of unspent capital, have pivoted from China to look at other markets in Asia, particularly India and Southeast Asia, bankers and investors said.

India M&A shot up 55% by end-September to reach $145 billion, Refinitiv data showed, thanks to its largest private lender HDFC Bank Ltd’s (HDBK.NS) $40 billion acquisition of its biggest shareholder in the country’s biggest-ever deal.

Southeast Asian startups are also enjoying a boom in fundraising exercises by venture capital and buyout funds that are chasing bigger returns outside China.

Within China, dealmakers said they expected opportunities for transactions involving multinational companies as the country’s economic growth outlook remains uncertain, the zero-COVID policy hits business confidence and Sino-Western geopolitical tensions linger.

“They are reviewing what to do to their China business by either bringing a Chinese investor or exiting it,” Samson Lo, co-head of Asia Pacific M&A at UBS Group AG (UBSG.S), said of global firms.

Packaged food giant Kraft Heinz Co (KHC.O) is selling its baby food business in China, valued at around $150 million, with second-round bids due soon, said people with knowledge of the sales process. They declined to be identified because the information is confidential.

Kraft Heinz did not respond immediately to a request for comment.

Reporting by Kane Wu in Hong Kong and Roxanne Liu in Beijing; Editing by Sumeet Chatterjee and Jamie Freed

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