February Insight– Plenty of Quail, but No Powder in the Chamber

A recent European Central Bank survey showed that credit conditions in Europe tightened sharply in the last three months of 2011, with banks reporting that they expected lending conditions to deteriorate further this year.  Local banks are under immense pressure to raise capital or shrink their loan books to meet new regulations with most choosing the latter course.  As a result, European corporate defaults are widely expected to climb sharply this year as bank lending cuts and a deteriorating economic backdrop put many smaller or indebted companies under pressure.

What a golden opportunity this evolving situation represents for Chinese companies, particularly ones from the private sector, as the European businesses facing difficulties are often of a “digestible” size and have great people, technology and brands.  The private entrepreneurs of Wenzhou and scores of other manufacturing and industrial cities see the enterprises they have admired, emulated and often copied these past decades now begging for a white knight.  

A massive pity then that the continuing banking credit squeeze in China, which is pinching the private sector while tight money is dished out to Government-backed companies, means that the resulting M&A opportunities in Europe are often, and increasingly, left hanging.

Western companies and professionals eyeing China this year can see that there is a window to help Chinese private sector companies merge with, or acquire quality European businesses and integrate them into the expanding Chinese domestic market.  Here, interestingly, apart from insufficient money, the other transactional problems are the high risks associated with crossing into Western business and culture. On both counts, foreign players could add great value.

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