China 2017: Snapshot

China 2017: Snapshot

China is facing some structural problems in 2017, Said Medley Global Advisor (MGA), a research institute of Financial Times.

The first one is whether China’s economy can achieve its re-balance of reducing reliance on investment and increasing consumption in 2017. As the average increasing rate of 6.7% in 2016 is exactly the same as its target (at least according to official propaganda), MGA estimated, household consumption accounts for 1 point percentage more than last year, achieving 39% of the domestic nominal GDP. Even though the percentage is far less than advanced economy, it demonstrates China’s stable development since 2008’s financial crisis.

China Gdp growth

Unfortunately, China is not likely to sustain its increase of household consumption in 2017, as the household income’s increasing rate slows down from 16% in 2011 to 8%, while the dramatically climbing price of house suppresses people’s expenses.

As for the next year, The International Monetary Fund upgraded its growth forecast for China’s economy in 2017 to 6.5 percent, 0.3 percentage points higher than their October forecast, on the back of expectations for continued government stimulus.

Meanwhile, the debt market in china should be highlighted, MGA emphasized, as the ratio of outstanding obligation to GDP is approaching 265%, China’s debt market is always expanding, making the asset riskier, but it’s still quite possible to issue a large scale of debt in 2017. Chinese government set the target to issue from 11 trillion to 12 trillion RMB debt for local government (1.6 trillion to 1.7 trillion dollars)—much higher than 6 trillion in 2016—as to finish the plan of exchange local government’s debt that started in 2014.

In 2017, default of enterprises and bankruptcy are more likely to happen, especially considering Beijing is now leading reform of cutting overcapacity in some industry.

 forex

China’s foreign exchange reserves fell from $4tn to $3tn in the past three years despite a persistent trade surplus. The first month of 2017 found China’s foreign exchange reserves fall below $3tn for the first time in the past five years despite Chinese government’s tighter controls on capital outflows. In February, China’s central bank managed to raise the reserves to $3.01tn. This first raise after an 8-month declines in a row indicates Chinese government’s resolution in setting a safety line for its foreign reserves, although there is no consensus on the bottom line number yet among experts familiar with the topic.

Trading Economics forecasts China’s foreign reserves to continue falling below $3tn for the next quarters of 2017. The publication expects the country’s foreign reserves to remain around $2.84tn by 2020.  In the meanwhile, the country’s central bank chief said in a press conference that such decline is a normal phenomenon because the nation does not want that much forex reserves. Despite the decline, China still holds the largest forex reserves in the world, much higher than the runner-up, the chief commented.

State Administration of Foreign Exchange(SAFE) said that China’s foreign reserves will gradually stabilize despite the uncertainties in the international financial market. With China’s growing economic momentum, there will eventually be less control on capital outflow.

Authors: Yiping Zhang and Zhengyi Hu

Spain Overview: Economic Analysis and M&A Market Trends

Spain Overview: Economic Analysis and M&A Market Trends

Overview of the Spanish Market
Spain has the fourteenth-largest economy by nominal GDP in the world, and it is also among the largest in the world by purchasing power parity. The Spanish economy is the fourth-largest in the European Union, and the fourth-largest in the Eurozone, based on nominal GDP statistics (GDP 2016: $1252 trillion). Following the financial crisis of 2007–08, the Spanish economy’s plunged into recession, entering a cycle of negative macroeconomic performance. Compared to the EU’s and US. average, the Spanish economy entered recession later (the economy was still growing by 2008), but stayed there for longer. The economic boom of the 2000s was reversed, leaving over a quarter of Spain’s workforce unemployed by 2012. In aggregate terms, the Spanish GDP contracted by almost 9% during the 2009-2013 period. The economic situation started improving by 2013-2014. The country managed to reverse the record trade deficit which had built up during the boom years attaining a trade surplus in 2013 after three decades of running a trade deficit. The surplus kept strengthening during 2014 and 2015. In 2015, the Spanish GDP grew by 3.2% (one of the highest among the EU economies in 2015). In 2014-2015 Spain was able to recover 85% of the GDP that went lost during recession (2009-2013). In all the quarters of 2016 was registered a strong GDP, with the country growing twice as fast as the eurozone average. According to the IMF forecast, Spain will recover in 2017 all the GDP growth lost during the economic crisis, exceeding for the first time in 2017 the output level that had been reached in 2008.

Economic Forecast: Steady GDP growth for the 4 next years.
Fiscal stimulus and the ease of monetary policy from the ECB has contributed significantly to the growth of Spanish economy in 2016. With a growth of 5.5% over 2015 Spain’s GDP is expected to keep growing at a slower but steady pace for the next 4 years with domestic demand leading the recovery.

Spain GDP

Labour market: An improving but still challenging environment
The recent reshaping of the labour market through a series of reforms actuated by the new government has contributed to improve Spain labour market conditions and to put it in a strong position to capture future growth. Anyway, with an unemployment rate still at about 19% Spain is the second worst economy of the Eurozone in terms of unemployment, with youth unemployment posing a particularly acute challenge for the future of the economy.

Spain Unemployment

Fiscal policy: “little room for future fiscal stimulus”
With a public debt around 100% of the GDP and a deficit slightly below 5% of the GDP Spanish authorities have little room for fiscal expansion. After two years of significant easing of fiscal policy Spain has to find out a way to stimulate growth by shifting the structure of taxations towards growth enhancing initiatives such as education and R&D that are still below levels of peer countries after having been reduced significantly during the crisis.

Political situation: “achieving stability following 1 year without a real government”
After a year without a government Spain has finally achieved a stable political situation. The measures adopted to tackle budgetary austerity and labour market performance appear to have paid off as the economy is expected to grow by 3%. With a government in place, Spain is well prepared for further growth in a European environment where access to cheap financing is available. Furthermore, M&A activity has increased significantly following legislative changes in 2015, which aimed at facilitating the capitalisation of debt and the acquisition of business units from insolvent companies.

Sources:  OECD outlook on Spain economy, Grant Thornton European M&A activity report

 Deals Volume in 2016
The Spanish economy has continued growing during 2016. In 2016, Spanish M&A transactions totalled a range between €88bn[1] and €111bn[2]. The total deal value in Europe reached an amount of €1.502 bn: the Spanish market represented 5,9% of the total deal value in Europe. The increase shown in 2016 was encouraged by factors like those presented in 2015: continued economic growth; low interest rates and increased market liquidity; negative inflation; foreign trade balance; and stable risk premium for the Spanish sovereign debt. According to the M&A Attractiveness Index drawn up by the M&A Research Centre at Cass Business School, Spain has climbed several positions in the ranking of the most attractive countries for M&A purposes.  Spain fell to 26th position in 2012, but is now ranked 16th. If we break in details the total amount of transactions made in 2016 per size and per Inbound and Outbound, we obtain these numbers[3]:

Mid-market transactions showed a 43.5% increase compared to 2015.  Large-sized and small-sized transactions showed a slight increase in value of 4.5% and 1.1% respectively. Inbound investments increased in number during 2016.  The number of foreign acquirers of Spanish companies increased by a remarkable 9.3% compared to 2015 and outbound investments increased by 25.4%.  The most active sector in terms of M&A deals was real estate which increased to 11.6% compared to 2015.  In general terms, the real estate market continues growing as big banks keep unloading assets and tax structures such as Spanish Reits (SOCIMIS) and collective investment vehicles remain appealing to domestic and foreign investors.

Spain Sector

The main M&A transaction that took place in 2016 in Spain was the merger of the Coca-Cola bottling companies for an amount of €20bn.  Coca-Cola Enterprises CCE.N combined with Coca-Cola Iberian Partners (CCIP) and the German bottling business of Coca-Cola to create a new company that is the world’s largest independent bottler of Coke drinks by net revenue. The transaction gave new company, Coca-Cola European Partners (CCEP)[4].

According to the data collected by Thomson Reuters, the top actors per value and numbers are[5]:

Spain M&A Actor

The two Spanish banks Santander and BBVA do not owe their position to any concrete operation. On the contrary: their situation has been created thanks to the sum of many transactions of medium size. “This year has been one marked by the lack of big transactions, but characterised by mid-sized deals”, indicates an executive of a financial institution. “Banks which have the capacity to reach this segment have been very active”, he adds[6].

This lack of big transactions is reflected also on the deal volume of big American banks as JP Morgan and Goldman Sachs. In 2015, the last one was first in this ranking made by Reuters and now it is eight losing 6% of market share. Others American banks have kept their position and in particular Citi is gaining position in this ranking.

Outlook – Trends
One of the biggest player KPMG expects the M&A market in Spain to perk up based on the favourable development of the Spanish economy[7]. According to them investors regained their faith in Spain and see it as a reliable market with an abundant amount of liquidity. In particular, the interest of investors is driven by market growth expectations, legal security, the global importance of Spanish companies and the new reforms that make the Spanish economy more competitive[8]. A study conducted by KPMG shows that investors are 7% more confident to realize M&A activity in 2017 compared to year before[9]. Furthermore, the M&A market capacity is expected to be growing by 14% compared to 2016. Concerning the importance of the sectors, KPMG foresees that most M&A activity will be in consumer goods, health and finance. Consequently, they also expect the number of IPOs to increase. A partner of Magnum Capital, a leading private equity enterprise in Spain, the Spanish M&A market didn’t use its full potential due to uncertainty of the effects of the Brexit and the political instability in Spain[10]. Therefore, his forecast for 2017 is very positive mainly based on the fact that many operations were stopped in 2016 and are expected to be closed in 2017. Baker McKenzie, the second biggest law firm worldwide and specialized in commercial law, predicts the M&A activity to grow by 41% until 2018[11]. This is mainly explained by the competitive advantage resulting out of the labour reform in 2016 that is resulting in growing employment[12]. Also, they expect the IPO activity to grow significantly during the next three years based on the difficulties in 2016[13].

Main challenge of 2017:

1. The first is the normalization of the labour market. The unemployment rate is finally below 20%, and the Spanish economy has been outperforming the rest of the eurozone since 2015. But the good labour market performance cannot hide an hysteresis effect that is changing the quality of the labour market. A real long-term unemployment problem is emerging, together with the loss of human capital that this entails. This means that employability is decreasing, and that much higher growth rates in the future may be needed to keep unemployment on a decreasing trend. The problem of long term unemployment is compounded by youth unemployment, that remains extraordinarily high at more than 40%, and NEET young people can be found especially among the low-skilled, with a serious risk of poverty. Dualism of the labour market is a source of fragility and of insufficient investment and innovation.

2. The second challenge is the fiscal stance, and it is of course related to the debate in Europe. The Spanish government has strongly reduced its net lending (including the structural deficit) that nevertheless remains at around 5% of GDP.  Yet, the Spanish situation clearly needs a more expansionary environment, that could only come from the rest of the Eurozone. Continued austerity will not help with Spain’s most pressing problem, hysteresis and long term unemployment.

3. The effects of the Brexit referendum remain unpredictable.[14] How it will impact the M&A activity in Spain and Europe depends on how Britain will foster the exit and how the process will develop.

 References:

Agencia EFE (2017)

Las fusiones y adquisiciones aumentarán un 41 % en España hasta 2018, http://www.efe.com/efe/
espana/economia/las-fusiones-y-adquisiciones-aumentaran-un-41-en-espana-hasta-2018/10003-3156469.

Argali Abogados (2017)

Spanish M&A surges again despite obstacles, http://www.mandaspain.com/spanish-ma-surges-again
-despite-obstacles/.

Baker McKenzie (2017)

Baker McKenzie prevé para España un aumento del 41 % en M&A hasta 2018, http://www.bakermckenzie.com/es/insight/publications/2017/01/global-transactions-forecast/.

Europa Press (2015)

El mercado de fusiones y adquisiciones resurge en España, según KPMG, http://www.europapress.es/economia/finanzas-00340/noticia-mercado-fusiones-adquisiciones-resurge-espana-kpmg-20150316183707.html

Expansion (2017)

Las fusiones y adquisiciones crecieron un 20% en España en 2016, http://www.expansion.com/
empresas/2017/01/01/58692ab4468aeb670d8b45e1.html

[1] Expansion
[2] Mergers Market
[3] Global Legal Insight
[4] Thomson Reuters
[5] Thomson Reuters
[6] Expansion
[7] This and the following Europa Press
[8] Expansion
[9] This and the following Europa Press
[10] This and the following Argali Abogados
[11] Agencia EFE
[12] Baker McKenzie
[13] Agencia EFE
[14] Here and the following Argali Abogados

Authors:

Virginia Bassano, Luca Pancari, Andrea Terzi, Felix Oliver Napp