Inbound M&A into Asia declined but also reshuffled into ASEAN, Australia, and India

Covid, rising interest rates, and heightened geopolitical risks have dampened cross-border international investment appetite for merger and acquisitions (M&A) in Asia. This is particularly the case for China given the rapidly deteriorating macroeconomic outlook and the persistence of zero-Covid policies, regulatory restrictions, and the real estate demise.?Inbound M&A deals into Asia fell in first half 2022, both by number of cases and total value. ?The decline was especially sharp for inbound completed deals into China, making up 13% of total inflows, the lowest share since 2006. Meanwhile, ASEAN, India, and Australia, while down, attracted significantly more capital since 2020. Flows were reshuffled to reflect rising need for diversification of supply chains, demand and securing energy sources. ASEAN attracted 56% of total inbound flows – making it the largest share in Asia, with Indonesia punching above its weight and twice as much as mainland China’s completed deal.

Divergence in growth trends partly explain the reshuffling: ASEAN, India, South Korea, and Australia normalized growth since exiting strict Covid policies, boosting demand and production. Tightening inbound regulations are another reason: restrictions to inbound M&A have increased not just in the US and EU but also in Australia and Japan. In turn, ASEAN and India loosened restrictions. China, too, eased but primarily in services.

Regarding sources of Asia bids, the US remained the largest M&A inbound investor in Asia while China’s role declined. China’s drop of investment to Australia and Japan is due to both weakened outbound appetite as well as increased scrutiny and rising geopolitical tensions. That said, both the US and the EU increased their share of allocation to Australia. The biggest bid was for ASEAN assets, with sizeable increase by level and share by China and the US. Meanwhile, bids from the US and EU for Chinese assets are down but those of Japan and South Korea are up.

The sectoral distribution of M&A deals into Asia shows that all sectors declined, except for infrastructure, which was driven by higher inbound into Australia. ICT received the most bids and the majority was deployed to ASEAN. India got more M&A inbound for the auto sector, whereas ASEAN received most in energy and real estate. Australia dominated most of the M&A bids into developed Asian economies. In other words, across most sectors, Southeast Asia, India, and Australia received most bids, except for semiconductor and healthcare where China received more, but the absolute level declined substantially.?

All in all, a challenging year has led to a decline of completed inbound M&A deal value for Asia, and details show significant reshuffling of flows to Southeast Asia, India, and Australia while bid to China declined sharply. The reshuffling of investment destination reflects short-term shocks and longer-term trends that necessitate diversification of supply chains, exposure to growth markets and secure energy. Notably, the reshuffling affects not just US and EU demand for Chinese assets but China’s rising bid for ASEAN and India.

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