So much for the promised land. China was supposed to provide a lucrative outlet for global private equity firms trying to wring returns from portfolio companies back home. But in reality, it is proving a lot harder to crack.
There are pockets of hospitality: Shanghai has expedited looser registration requirements and lighter tax burdens for joint ventures with local firms, and has given the green light to JVs offering renminbi funds. But foreigners swarming over the mainland face two big problems. The first is stunted deal flow: Dealogic data shows a fall of 66 per cent in sponsor-led buy-out activity so far this year. And while foreign currency deals still dominate by value, local funds are wresting the initiative by volume. Data from Zero2IPO, a Beijing-based research house, suggests that renminbi funds bagged three deals for every one led by a foreigner in the second quarter.
The second problem is perhaps more serious. Overseas firms had spent years patiently laying the groundwork to supply fast-growing Chinese companies with equity capital – only for the state to scrap quotas on bank lending, swamping the country with cheap debt. In the past, bank credit was rationed, and other non-bank sources of medium to long-term debt were effectively suppressed. For most of this decade, aggregate loan stocks had been falling, as a percentage of gross domestic product. But in the first half the taps were well and truly open. There were anecdotes aplenty of companies turning down private equity term sheets in favour of cheap debt from a local bank, with few strings attached.