BY PETE SWEENEY

China is preparing to set its most important GDP target since the global financial crisis. The country faces an unprecedented swathe of economic challenges, implying a significant downward revision to growth goals from the “above 6%” for 2021 to something that signals sustained pressure on bad debt. What President Xi Jinping chooses will measure his power to drag China onto a less wasteful development path.

The Chinese Communist Party has every reason to downgrade expectations as flattering comparisons to earlier Covid-19 damage fade. Beyond the threat from new variants, authorities in Beijing have initiated a broad campaign to curb financial risk in the property sector, which contributes between a quarter and a third of the country’s economic activity. They have their work cut out ensuring a sector shaken by China Evergrande and others doesn’t collapse, including seeing that $2.5 trillion of pre-sold properties are completed to fend off a crash in consumer confidence.

Retail sales, domestic tourism and the services sector have lagged under lockdown, but their malaise was offset somewhat by export demand for medical supplies and e-commerce. As trading partners normalise, however, that is unlikely to be sustained. As for productivity gains, they have been dragging on China’s economic growth, not contributing. Prioritising state enterprises exacerbates the latter trend.

After just 4.9% expansion in the third quarter, a 2022 slowdown is widely expected. It could get ugly. Xi is trying to keep investors convinced that “flood-like stimulus” is not imminent, which means refraining from big interest- rate cuts while digesting loan and bond defaults. That implies growth closer to 4%, well short of the 5.5% or so that government advisers are pushing.

A more conservative target would indicate Xi is serious about reshaping the $15 trillion economy. The danger is that bureaucrats freeze up, as they did during a 2015 anti- corruption campaign. It also would strain local government finances. The alternative, though, is re-warming investment in housing and infrastructure, which would keep output imbalanced, further stretch China’s debt-to-GDP ratio and encourage investors to discount tough deleveraging talk.

If Xi can force the system to stay on its credit diet, however painful, it will be the strongest sign yet of his clout.

First published December 2021

BY JENNIFER HUGHES

The party’s over for Chinese companies in New York. They’re being squeezed by lawmakers in both Beijing and Washington over data protection, accounting oversight plus other crackdowns and political spats. New U.S. rules that would usher out lingerers won’t apply for two years but waiting until the last minute only will make leaving harder.

New American laws will force companies to delist if their audit papers can’t be reviewed by U.S. bean-counter watchdogs. Assume no change in China’s reluctance to clear the way, and some 270 enterprises are in danger of getting the boot in 2024.

Beijing’s own recent efforts to control corporate funding options and tighten security over consumer information also have spooked overseas investors. Nasdaq’s Golden Dragon index of U.S.-listed Chinese stocks fell roughly a third from the start of 2021 through early December while mainland-listed blue-chip counterparts were broadly flat. The ability to fetch higher valuation multiples had been one key Manhattan attraction.

Even if the current pressures ease, U.S.-Sino tensions will persist. Nearly two dozen companies, worth some $800 billion, have sought a dual listing in Hong Kong. Another 100 or so with a total market capitalisation of about $400 billion, led by e-commerce outfit Pinduoduo, meet the Asian hub’s standards, Bank of America analysts reckon. It’s easy to see half that combined sum relocating its centre of trading in 2022. Indexers including MSCI and FTSE already use the Hong Kong price for Alibaba and others.

As the queue grows, so does the danger of investor fatigue and valuation discounts. Similarly, buyouts could be complicated by higher borrowing costs or pushy shareholders. Asian private equity firm PAG recently teamed up with hedge fund Oasis to make an offer for online marketer iClick Interactive Asia that will at least force its controlling owner to lift any bid. Some 150 companies worth a combined $40 billion probably will need to be acquired before seeking another listing venue.

The bottom line is that U.S.-listed Chinese companies will spend much of 2022 scrambling to replenish capital. The race will be on before escape routes get crowded. Didi Global is already hailing a $32 billion ride home. Others will have to rush to beat the traffic.

First published December 2021

BY GINA CHON

If President Joe Biden’s stock falls in 2022, that of America’s corporate bosses is likely to rise. Midterm elections in November are likely to punish the governing Democratic Party and will probably hand rival Republicans at least one chamber of Congress. With Washington in gridlock, companies will get a reprieve from the commander-in-chief’s more aggressive ideas.

Biden handed company executives a good year in 2021. He pushed a $2 trillion stimulus package in March, which boosted consumer demand and corporate profit. The S&P 500 Index gained around 40% between Biden’s inauguration in January and early December. America’s richest 1% slightly increased its share of national wealth in 2021, according to the Federal Reserve.

In so far as companies and wealthy individuals benefited from all of this, the carrot was supposed to be followed by a stick. Take regulation, for example. Corporate mergers, which often enrich executives but result in job cuts, are meeting more opposition from a newly staffed Federal Trade Commission. Wall Street is bracing for a harsher head of supervision at the Federal Reserve than the outgoing Randal Quarles. 

The midterm elections, though, are likely to put a stop on further action. Republicans control about 60% of the country’s state legislatures. They need to flip only five seats held by Democrats in the 435-member U.S. House of Representatives to gain control in the lower chamber; they flipped 15 in 2020. Even without a majority, Republicans – plus a couple of moderate Democrats – hollowed out Biden’s plan to raise taxes on investment and jack up the levy on corporate income.

A Republican-led House would likely target Democrats rather than companies – including possibly investigating the Biden administration’s handling of the withdrawal from Afghanistan. If Democrats retain the Senate, they can summon chief executives to hearings, but those tend to cause only temporary discomfort. More substantive changes in antitrust law, like requiring big technology firms to divest of certain businesses, would probably get stuck; tax increases will be off the menu.

Even without Congress behind him, the president can throw grit into corporate wheels. Regulators he appoints, or at least those who obtain Senate approval like FTC Chair Lina Khan and Environmental Protection Agency Administrator Michael Regan, will still be in place. But companies gained from Biden’s first-year actions, and they’ll gain more from the forced inaction that follows.

First published December 2021

BY GEORGE HAY

Qatar’s World Cup has suffered an awful lead-in. Since the tiny emirate successfully pitched for soccer’s quadrennial showcase event in 2010, it has grappled with accusations of corrupt bidding and exploiting migrant workers. Shifting the competition to November 2022 to avoid Qatar’s unbearable summer has further lowered expectations. Yet the jamboree could still be a success for the region.

Back in 2010 Qatar argued the World Cup could benefit the whole Gulf. As recently as 12 months ago, that sounded fanciful. Qatar was in the fourth year of a blockade spearheaded by Mohammed bin Salman and Mohamed bin Zayed, de facto heads of fellow Gulf Cooperation Council members Saudi Arabia and the United Arab Emirates. The short hop from Dubai to Doha had become a lengthier round trip via neutral Oman. While the blockade ended in January, Saudi and the UAE have been at odds over trade tariffs and oil policy, and whether multinational companies will locate regional headquarters in Dubai or Riyadh.

Hosting the World Cup won’t banish these tensions. But the tournament may rev up the GCC’s anaemic post- pandemic recovery. Though the GDP of leading Gulf countries suffered the same 4.9% average contraction as the G7 in 2020, they’re set to grow just 2.6% in 2021, half the rate of the largest developed economies, the World Bank reckons. Sales of oil and gas, which bring in over half the state revenue of most GCC members, are still recovering after the 2020 demand slump.

An influx of tourists would therefore be welcome. The World Cup should bring more than 1 million fans to the emirate, equivalent to a third of its population, according to the tournament’s chief executive. But it’s not clear where they will all stay. Dubai, Abu Dhabi and Bahrain can all benefit by offering alternative bases.

Things could yet go awry. Though Doha is less uptight than Riyadh, inebriated western fans could face brusque treatment. The national teams of two even fiercer enemies, Saudi Arabia and Iran, may face each other on the pitch. And another virulent strain of Covid-19 could see France’s Kylian Mbappe and England’s Raheem Sterling playing in empty stadiums.

Still, the Gulf’s first World Cup seems like more of an opportunity. To wean the GCC’s young populations off fossil fuel-enabled state subsidies, their economies need foreign direct investment inflows to aid short-term recovery and longer-term diversification. Despite its unsavoury origins, Qatar 2022 is a handily timed shop window.

First published December 2021

BY ROB COX

It should have been what the French call “une évidence” – a no-brainer. Nearly a year ago, Alimentation Couche-Tard, a Quebec convenience store chain, offered to drop $20 billion in the land of its founders’ forebears to buy French grocer Carrefour. The Quebecois promised to invest billions of euros in the business and not to fire anybody. Yet Gallic President Emmanuel Macron’s government dismissed the deal with a Jupiterian wave of the hand.    

True, the Canadians were clumsy in their approach. They hired Macron’s former employer, top Parisian investment banking firm Rothschild. But Couche-Tard’s due diligence consisted more of walking the aisles of Carrefour and Monoprix supermarkets than briefing Finance Minister Bruno Le Maire. Surprised by the takeover approach, he rejected it outright on cable television.  

The episode illustrates the extent to which politics and private enterprise are entangled in the world’s seventh- largest economy. And it explains why Parisian finance will start 2022 relatively placidly but likely end the year with a bang. Macron is fighting for a second term in office. While he is comfortably ahead in the polls as 2021 wraps up, his swift ascent to the presidency five years ago and the fickleness of French voters, who have not given a second term to any president since Jacques Chirac in 2002, mean re-election in April is not a given.

This will dampen bankers’ ardour for deals before the elections. That’s not just because they fear transactions, especially those involving international acquirers, might face extra scrutiny during this politically febrile period. It’s also because there’s a strong pro-Macron faction among the CAC 40 executive class that wants to avoid doing anything that might boot a former corporate financier from the Élysée Palace.    

Macron has been generally good for business and dealmaking. As of late November, French companies had been involved in some 2,900 transactions with a combined value of more than $252 billion, according to Refinitiv data. At that pace, 2021 may turn out to be, if not greater than the record year of 2006, the most active since 2007, when $288 billion of transactions were inked. 

Granted, Macron has stymied some big deals, including Renault’s merger with Fiat Chrysler Automobiles two years ago. But the current crop of contenders for his job may not be any more accommodating. Éric Zemmour, a former journalist with eurosceptic and hardline anti-migration views, would likely be even more hostile to business and foreign capital than Macron’s leading challenger on the right, Marine Le Pen.   

The left is fragmented for now. Meanwhile, Michel Barnier, who led the European Commission’s negotiations with Great Britain over its withdrawal from the European Union, is vying with Valérie Pécresse, head of the Paris regional government, to represent the centre-right. Neither is perceived to be more open to market forces than Macron.   

Against this backdrop, sensitive deals will be on hold, at least until after Macron wins the election, and perhaps for longer if his party fails to gain a robust position in the National Assembly. The biggest of these would be a long- expected restructuring of EDF, the giant electric utility in which the state holds an 85% stake. A deal would likely see the company’s small stock-market float acquired by the government, and its renewable energy assets separated from its nuclear power business.     

Foreign purchases of businesses in industries deemed strategic – a definition France has stretched to include yogurt, supermarkets, cars and beyond – would remain off limits. In late November the finance ministry extended stricter measures on foreign ownership of companies it deems strategically important to the country for another year. Foreign buyers must receive permission to take stakes of more than 10% in listed companies in the health, electronic communications, technology, aerospace, data centres, media and food safety industries.   

And private equity buyers, who are seen as temporary owners, will want to avoid assets that touch national interests. That would, for instance, seem to preclude any imminent sale of companies such as Idemia, a security business acquired by Advent International and Bpifrance from Safran in 2016. The company, worth more than $3 billion, specialises in biometric identification technology, and provides services to the government, including border control. Putting an asset like that into play during an election would be tricky.    

Similarly, privatisations, such as of the government’s 51% stake in Aéroports de Paris, which Macron wanted to use to start an innovation fund, may have to wait until late 2022, if not beyond. While a referendum to block any sale of the airport operator failed to garner enough signatures in 2020, the company trades at half its pre-pandemic high, making a sale less attractive financially – and potentially easier for opponents to criticise.   

Difficult, but not impossible, to pull off in an electoral campaign would be domestic mergers that raise anticompetitive issues. That said, in October Macron declined to renew Isabelle de Silva’s mandate as chief antitrust watchdog – a sign many bankers took to mean that he wants to more easily facilitate the creation of domestic and European champions.   

Still, the problem is that in-market deals generally mean job cuts, which would hand Macron’s opponents ammunition. While not the primary cause for the termination of talks in October between Carrefour and privately owned Auchan, it hovered over the deliberations. A merger would have resulted in a domestic juggernaut with a 30% market share, reduced consumer choice and fewer jobs in the sector.    

After the election, a Carrefour combo with Auchan – or even a Couche-Tard redux – may be possible. Even crunchier mergers, such as a long-studied purchase by BNP Paribas of crosstown rival Société Générale, could be on the table. In the meantime, pent-up demand for overseas assets by French heavyweights with clean balance sheets like LVMH, L’Oréal, Kering, Sanofi, TotalEnergies and Schneider Electric may be more palatable politically. Whether their shareholders can stomach the prices they will have to pay abroad is another matter entirely.

First published Nov. 30, 2021

BY GEORGE HAY

The Saudi Arabian capital, Riyadh, has long been seen by international bankers and executives as a place to visit for work, before weekending in the UAE’s more western friendly hub, Dubai. That crowd may develop a nagging fear of missing out.

Economically, Saudi dwarfs regional Gulf peers. Its $700 billion GDP in 2020 was double the UAE’s, with three times the population. Its domestic stock market’s $2.6 trillion market capitalisation is over four times those of Abu Dhabi, Dubai and Qatar combined.

There’s also loads of work. In the next four years, Saudi wants to raise $55 billion via privatisations, and that doesn’t include further asset or equity sales by $1.9 trillion oil giant Aramco. Nor does it encompass disposals by the $450 billion Public Investment Fund, which recently sold down a big chunk of its 70% stake in $61 billion Saudi Telecom Company. Crown Prince Mohammed bin Salman envisages $3.2 trillion of public and private investment over the next decade to shift the domestic economy away from oil.

Big western banks are keeping quiet about whether they will follow the 44 multinationals, including Novartis, Unilever and Deloitte, and establish regional headquarters in Riyadh. Part of that is a desire not to offend the UAE, where Dubai harbours fee-generative privatisation plans of its own. Riyadh’s relative lack of good schools remains an issue. And it’s also only three years since the crown prince faced international condemnation for the murder of Jamal Khashoggi in Istanbul, which U.S. intelligence agencies believe he sanctioned.

One basic reason why JPMorgan, Goldman Sachs and co. may overcome their reluctance is that the Saudi government has made it clear those who don’t move by end-2023 will struggle to win the kingdom’s business. But fading overseas scepticism is another pull factor. The number of foreign investors registered at the Tadawul has more than doubled from 6% in 2019, and Saudi’s foreign direct investment inflows rose during the pandemic.

Riyadh may also become less of a social desert. Gigs by Miami rapper Pitbull, World Wrestling Entertainment matches, and Saudi ownership of the Newcastle United football club reduce the cultural distance with the west. More importantly, cafes and restaurants where men and women can mix are now commonplace. One long-term Saudi observer thinks even the final taboo – drinking alcohol – may soon get a better workaround. If so, Dubai’s pre-eminence will be sorely tested.

First published December 2021