Here are the three big moves by the Chinese government in 2021 that everybody is watching:

• After years of a hands-off approach toward e-commerce super-platforms and their required exclusivity from small merchants, the government has suddenly cracked down. The State Administration of Market Regulation penalized Alibaba, JD.com, and Meituan with historic fines, citing antitrust concerns. It was a move that significantly increased costs for the super-platforms and changed business approaches for small merchants as well. This reflects the evolution of Chinese policy over the past year.
• Common prosperity is now a top priority for the Chinese government, which is aiming to narrow the country’s wealth gap and expand the middle class. Among the steps taken: imposing price caps on new housing, expanding medical insurance coverage, and eliminating off-school K–12 tutoring (a huge business that was available only to wealthier parents).
• China has been a leader on the frontier of digital innovation, yet data privacy has been relatively loosely controlled up to this point. In the interest of national security and privacy, the government has recently taken steps to protect sensitive data, ranging from geolocation data to the financial data of state-owned enterprises. This was most dramatically demonstrated when, days after the massive ride-hailing platform Didi’s IPO on the New York Stock Exchange, the Chinese government conducted a sweeping crackdown on the company for misuse of customer data.

These and other sudden regulatory developments took an immediate toll on China-related publicly listed equities, especially tech stocks (see Figure 1). While the impact has yet to be felt on M&A, there’s a general concern about the near-term viability of deals.

Figure 1

Stock prices were hit in 2021 across all tech sectors in China

Implications for corporate M&A

While dealmaking has slowed in recent years, cross-border and domestic M&A is still an option, with deals such as China International Marine Containers’ (CIMC) $1 billion acquisition of A.P. Møller-Maersk's box manufacturing unit, Maersk Container Industry, a deal that confirms CIMC as the world's largest container producer, and China Resources Capital’s purchase of Viridor, a leading British waste disposal company. Other deals included Germany’s BASF’s joint venture (JV) with Hunan Shanshan Energy Technology and Chinese dairy company Mengniu’s acquisition of Milkground, a popular insurgent cheese maker that has grown at an annual rate of 112% since 2018.

China’s changing regulatory environment, however, requires dealmakers to adapt accordingly.

All dealmakers need to plan for longer approval times, and they also need to be prepared for extensive information disclosure requirements to address antitrust and data security issues.

Multinationals need to treat their China business separately from the rest of the corporation. For example, new regulations require many of the critical infrastructure elements (such as data centers) to be placed locally. That means multinationals must assess their current operations and add necessary backbone operations for China when looking to acquire within the country.

In fact, all multinational companies need to proactively evaluate their existing footprint and portfolio strategy as it relates to China. Corporations need to heighten the separation of personal data or company data related to their products or services that could pose security risks, and they are seeing the growing importance of collaborating with local authorities on these data privacy issues. While many companies have treated China as a separate business region to comply with the local requirements, for some companies, a carve-out could be the best option for preserving value. Companies should be continually revisiting their business strategy and understanding both the investments needed to comply with new regulations in China as well as the alternatives available via divestment.

Winning means taking advantage of areas in which the government is encouraging deals. New opportunities are emerging for investments in sectors such as fast-moving consumer goods. Strategic investors in these sectors should double down and more aggressively allocate resources to identify and invest in attractive targets.

Indeed, more strategic investors are actively making early-stage investments in China through corporate venture capital or by teaming up with venture capital (VC) or private equity firms. For example, Nestlé established its China incubator in 2018 and, two years later, committed $30 million as a cornerstone investor for Tiantu, a renowned local VC fund.

There was a time when the only way to gain entry into China was by establishing a JV with a local company. When foreign companies were permitted to operate on their own, some found great success while others encountered difficulty adapting to China. Now, more multinationals are revisiting the JV option, especially with domestic companies that have advanced technology or critical capabilities and resources to accelerate local R&D, approval, and route to market.

For example, in 2017, AstraZeneca established a JV with Chinese Future Industry Investment Fund (FIIF), a biopharma-focused private equity fund that is partly owned by the China State Development & Investment Corporation. The JV company, Dizal Pharmaceutical, incorporates all the scientific and technical capabilities of AstraZeneca’s Innovation Center China, while FIIF contributes funding and expertise toward establishing strategic partnerships in China. Conceived as part of a regulatory push to produce pharmaceuticals in China, Dizal has since achieved exponential growth.

China’s regulations may have tightened in various sectors and created stricter measures to protect sensitive data and national security, but this does not diminish the importance of this market for strategic buyers. Even as the country moves into a new era of regulation, China will remain an attractive market for growth and investment. For many industries, it’s still the world’s hottest market.