China is set to become the top choice in Asia for financial services investment and mergers and acquisitions (M&As), according to a PricewaterhouseCoopers report.

 

The report said M&A activity in the region's financial services sector is expected to gather impetus over the next five years, fuelled by growing expectation of market liberalization.

 

"With falling barriers in China, the threat of new competition continues to escalate, and executives have no choice but to maintain a constant look at new market trends and acquisition and strategic alliance opportunities," said Matthew Phillips, a transactions partner at PricewaterhouseCoopers.

 

The value of deals in the financial services sector totaled US$38.7 billion in Asia last year, a decline over the previous two years, which saw large deals in Japan. However, the number of deals remained high at 194, with China picking up momentum as activity in Japan tapered off.

 

According to the survey covering 130 senior executives in Asia's financial services industry, China remains the major target for M&A activities in the region. About 52 percent of respondents said they expected to conduct M&A activities in China over the next five years and just over a third would target India.

 

M&A activity in China has skyrocketed in recent years. The value of inbound M&A activities rose dramatically from US$2.4 billion in 2004 to US$15 billion in 2005, while the number of announced deals went up over the same period from 27 to 35.

 

"Interest in China's rapidly growing financial services sector has never been stronger," Phillips added. "And the interest has broadened from banks and insurers to securities companies, fund managers and trust companies as China's capital markets have recovered."

 

As the survey confirms, this activity is being driven by a strategic imperative to seek out under-serviced markets and broaden product and service offerings to better meet the demands of China's increasingly sophisticated financial services consumers.

 

Increasingly, international financial institutions are investing heavily in China's largest banks with little in return in the way of operating control. But as part of these equity deals, many banks are also negotiating joint ventures in fund management, insurance and credit card products.

 

"The key development is that market barriers are having less of a drag on M&A activity in China, one of the most challenging markets from both a regulatory and cultural perspective," said Raymond Yung, PricewaterhouseCoopers' China financial services assurance leader.

 

According to Yung, regulatory barriers elicit far less fear and loathing than five years ago as investors are demonstrating a willingness to engage with regulatory authorities over the long haul, either directly or through a local partner.

 

In terms of regional M&A activity in the financial services sector, more than two-thirds of survey respondents predict that their organizations will undergo significant M&A activity in the coming five years. However, 40 percent felt their organization did not have a track record of success in M&A activities.

 

(China Daily June 21, 2006)