Draconian measures to clamp down on Covid-19 have diminished China’s appeal as an investment destination. Merger and acquisition transaction values dipped 35 percent year-over-year in the first nine months of 2022 – hitting a level not seen since 2013, according to Refinitiv data. Investors could be reluctant to invest in 2023 even as restrictions are being lifted.

President Xi Jinping and his team have enforced a so-called “Covid Zero” policy since the pandemic erupted. That means the world’s second-largest economy has spent three years under economic restrictions and social lockdowns. Dealmaking was instantly impacted. M&A transaction value declined 19 percent to $637 billion in 2021. The plunge continued in 2022 as transactions worth only $266 billion were completed by September.

“The lockdown of Shanghai and other Chinese cities in the Spring of 2022 was the straw that broke the camel’s back in terms of international investor appetite for China,” says Niklas Amundsson, a Hong Kong-based partner at the global placement firm Monument Group.

Recently, Beijing has indicated a pivot away from the Covid Zero policy. However, Amundsson believes that investor sentiment isn’t likely to rebound quickly, because the market’s concerns stretch beyond the lockdown measures. China’s regulatory burden, slowing economy, Covid infection rate and demographics are still weighing on investor sentiment.

“Private equity is a long-term game and investors’ concerns are much more complex, ranging from geopolitical and regulatory concerns to those surrounding the slowdown of the IPO market and changes in local consumer demand,” he says.

“Finally, investors will need to be able to again travel freely to China before they will consider new investment opportunities in the country.” As of December 2022, China has lifted restrictions on international travel but other countries have announced new testing and flight limitations which could make business travel difficult for the foreseeable future.

Despite the challenges, investors could see some interesting opportunities emerging in the years ahead. Amundsson says there are two attractive investment themes in China. “The first one, and the strategy most private equity investors have been focused on for the last decade, is Chinese companies targeting domestic consumers. This will always be the core of the Chinese opportunity set, given the size of the population.

“The second, and more emerging, is Chinese companies are focused on global revenues. China is now at the forefront of innovation and technology in many fields. These companies are often less likely to be subject to regulatory risks in the same way domestic-focused companies are, which makes them interesting from a future risk/rewards perspective.”

Vishesh Raisinghani