The value of China's mergers and acquisitions in 2018 remained flat at US$678 billion, with record private equity activity offsetting the decline in outbound M&A, PwC said in its latest report. 

Overall deal volumes increased 11 percent in 2018 from 2017. But total transaction value was flat in 2018 from 2017.

The number of mega-deals — those worth more than US$1 billion — in 2018 also remained flat, with significantly fewer large outbound transactions offset by a moderate increase in the number of mega-deals from PE and domestic strategic players, the report said.

"A mixture of headwinds and uncertainties have framed the landscape for transactions," said Weekley Li, transaction services partner at PwC China.

"The appetite for deals is still there but there have been shifts in focus behind the scenes."

State-owned enterprises are making fewer overseas deals, focusing instead on internal restructuring and the domestic market. And private companies outspent their state-owned counterparts for the third year running. 

Europe continued to attract the highest dollar amounts, with US$50.9 billion of transactions conducted by Chinese buyers in this region. Asia and the US followed as the second and third largest destinations for Chinese outbound M&As.

Technology and consumer-related deals have been attracting the lion's share of activity, in line with government policy to encourage the introduction of foreign technologies, brands and consumer goods into the China market, said Annie Qiao, transaction services partner at PwC China.

"The search for technology and brands means that given the drop off in US deals, developed markets in Europe as well as some parts of Asia are now the biggest destination for Chinese buyers in terms of deal volume," Qiao added.

The value of PE investment activity hit a new high in 2018 at US$222 billion, marginally ahead of the previous peak in 2016, reflecting that the large supply of available capital met substantial demand for funding in the private sector, the report said.

The technology and fin-tech sectors were particularly active in the year with several mega-deals, including a US$14 billion funding round — the highest ever by a private company globally — by Ant Financial.

Numbers of PE-backed IPOs and trade sales both slid in 2018, with exit activities dropping to the lowest level in the past five years. The US and Hong Kong stock markets appeared more attractive, however, with both landing more PE-backed IPOs in 2018 than in each of the prior four years.

PwC expects a slower first half in 2019, as outbound activities continue to decline, with a number of uncertainties affecting the market, including pricing expectations.

"Overall we predict a better second half with overall activity broadly flat compared to 2018 over the whole of 2019," said Li.

"If there are favorable developments to current headwinds, we anticipate a fairly strong rebound in the second half, as the fundamental drivers of Chinese outbound M&A remain in play."

"We do expect to see a recovery in outbound deals and some strong PE activity in the last six to eight months of the year as well as some up-tick in foreign inbound transactions, spurred by further opening up in specific sectors such as the automotive, financial services and technology sectors."

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