Digital economy

In 2020, China's digital economy reached USD 5.4tn accounting for 38.6% of GDP[4] – the world's second largest digital economy[5]. In June 2021, the number of internet users in China reached 1bn, the number of 5G base stations reached 1.16m, and the number of 5G terminal connections 450m[6]. Behind the large digital economy is China’s new ‘Infrastructure Plan’ – a major initiative of investment in data technology, infrastructure, and integration of the various fundamental technologies such as 5G, bigdata, AI and IoT[7]. This initiative will not only deliver a greater individual consumer experience and facilitate ‘consumption upgrades’[8], but more importantly, it will support the digital transformation of traditional industries within the supply chain. Such changes will in turn push for the structural transformation of the Chinese economy.

In addition to the Chinese government’s ambition across these sectors, leading technology and internet companies have also increased their investment in and development of core technologies. This is demonstrated through the leading Chinese technology and telco companies, such as Huawei, Alibaba and Tencent, ranking amongst the top 100 companies for absolute R&D spend worldwide (2020)[9]. In some subsectors of the digital economy, such as consumer internet, gaming and fintech, Chinese companies have already started exporting their technological know-how and scale advantage to overseas markets. We have seen this with Ant Financial Alibaba’s payment division and with Alipay, the operator of mobile wallets, extending its user base to 2bn+ consumers in 11 countries across Asia and Europe via investment and partnership[10].

Key areas of activity that we anticipate will continue to attract significant interest and capital from China in 2022 and beyond, include:

  • Fintech, regulated platforms with excellent banking relationships and deep customers penetrations. Examples include:
    • Ant Finance acquired Worldfirst, a UK-based international B2B payments business for £500m[12]
    • Tencent’s minority investment into Monzo, the leading British challenger bank in January 2022[13]
  • SaaS / software / internet infrastructure, including data centres, digital transformation software and services. Examples include:
    • A series of stake acquisitions of Global Switch, the UK’s leading data centre operator, by a Chinese consortium led by Shagang Group with the final quarter of stake acquisition[14]

Industrial technology

Since the initiation of the ‘Reform and Opening policy’ in the late 1970s, many European industrial players have established their roots in China[15]. It is estimated that about half of the European Union’s direct investment into China is in the manufacturing and industrial related sectors[16]. Although the digitalisation trend continues in China, the country still aims to maintain its vast industrial base as reflected in the new ‘Five Year’ plan released by the Chinese government in 2021[17]. According to this report, manufacturing will maintain a strong share in China’s economy (c.25%) indicating that China’s manufacturing market could rival Germany’s in the long run[18].

China’s industrial sectors are large in quantity but lack quality - several niche segments still have meaningful gaps in terms of technology and know-how[19]. As more of the budget manufacturing processes leave China for Southeast Asian countries driven by competing economies of scale, we believe there is a demand for domestic companies to fill these gaps to generate potential M&A opportunities.[20]

Although Chinese investors are still keen to look at high-end applications such as semiconductors and sensors due to the security sensitivities around them, take-overs in the industrial technology space have the potential to face local governmental scrutiny - as seen in the Newport Wafer Fab deal last year[21]. To avoid taking similar regulatory risks, we believe that most Chinese companies would look to expand into less sensitive areas with a focus on companies established in China - either through operational presence, market penetration, or both. An example of this shift can be seen through Wise Road’s acquisition of Huba Control from Siemens, where Huba’s pressure sensors and transmitters are already widely used in the ventilation and air conditioning sectors[22].

The other end of the manufacturing value chain, eg tools and equipment, has also become another ‘hidden gem’ for Chinese investors. Examples include ChemChina’s acquisition of German plastics process machinery maker, KraussMaffei[23], and more recently XJ Capital’s investment in Schmid Group, the leading PCB and solar panel processing equipment manufacturer[24]. Both target companies already had well established operations and market share in China prior to the transactions.

Key markets that we believe will generate significant M&A opportunities in 2022 and beyond are:

  • Mid- to high-end industrial equipment with applications in attractive sectors, such as consumer products and healthcare ie. the equipment used in the electronic manufacturing sectors
  • Niche segments with significant market potential in China, particularly mid- to high-end material or intermediate products, such as carbon fibre and graphite related products
  • Industrial services to support high-demand sectors, such as automation. Services are usually regarded by Chinese investors as less critical compared to products, hence the end market it serves would determine the level of interest

Healthcare technology

As demonstrated below, the unbalanced supply of healthcare resources, inadequate medical insurance coverage, and an ever-increasing aging population, are all causing China’s healthcare system to face unprecedented challenges in terms of complexity and scale.

The unbalanced supply of medical resources

Notes: 1) National Health Commission <2018 Statistical Bulletin of China’s Health Development>; 2) Include public health institutions + unrated hospitals + non-public health institutions; 3) Include physician assistant[25]

An aging population

Source: United Nations <World population prospects 2019>, IQVIA[26]

Inadequate medical insurance coverage

Source: National Medical Insurance Administration, IQVIA[27]

To tackle the medical resource imbalance and aging population, Chinese healthcare providers are developing more accessible healthcare solutions. Such developments include digital monitoring, diagnosis, and treatment; digital patient records, online drug sales and distribution; and integrated patient / hospital SaaS and apps. These solutions allow the physically concentrated resource to be distributed more evenly and widely across geographies. The Chinese government has also expressed its support for digital healthcare through the creation of national healthcare insurance in 2019[28], and the promotion of online prescription drug sales in 2020[29].

Chinese companies are also leveraging this area of opportunity by using M&A to identify and introduce tested and proven technologies as implemented amongst an aged demographic and developed societies across the West. One pioneer in this space is Andon - a leading Chinese MedTech company who acquired e-Device, the French leader in the connected care market, to accelerate its digital health offering. Subsequently, Andon strategically partnered with Xiaomi to integrate Xiaomi’s wearable devices - Xiaomi has also became Andon’s largest shareholder[30].  

To leverage strong existing R&D capabilities, we have seen Chinese companies seek out advanced technologies across the medical equipment and pharmaceutical sectors. An example of this trend was seen in Shandong Weigo’s USD 850m acquisition of the leading oncology and vascular interventional device manufacturer, Argon Medical in 2017[31]. Then in 2018, the acquisition of biomedical imaging equipment company, Esaote SpA, by a Chinese consortium led by Wandong Medical[32]. We believe that the MedTech sector is likely to see some disruption this year, particularly in traditionally foreign-dominated subsectors such as imaging devices, orthopaedic implants, and minimally invasive surgery related products. This will eventually lead to supply chain localisation and domestic product replacement.

The global pandemic has also accelerated the export growth of in vitro diagnostic (IVD) products from China – the polymerase chain reaction (PCR) test is based on molecular diagnostic technology, making it the fastest growing subdivision in IVD. Based on H1 2021 data from the General Administration of Customs of China, the export value of diagnostic reagent products has exceeded USD 6bn (January – May 2021)[33]. However, the competitive advantage of Chinese IVD companies is limited to testing device manufacturing due to the cost advantages and economies of scale. Chinese companies have accelerated investment in relevant overseas IVD assets to reach the upper end of the value chain for testing reagent development. This trend was seen in the China-based Mindray acquisition of Finland-based HyTest Oy, a supplier of core materials for testing reagents in May 2021[34].

Innovation on deal structure

We believe that the main motivation for cross border deals in 2022 will be riding the new wave of stock market listings or leveraging premium valuations in the domestic stock market. This will be seen particularly within the booming Shanghai Stock Exchange STAR Market - a Chinese science and technology focused equities market[35]. Acquiring an overseas technology or know-how which has significant application in the Chinese market, may mean an attractive IPO story or a boost to their existing share price for a strategic buyer. Blue Sail, the leading medical consumable manufacturer, exemplified this with their recent acquisition of Biosensors Inc. The deal permitted Blue Sail to successfully expand into the cardiovascular market as well as significantly boosted their share price post transaction.[36]

We believe that Chinese investors are also more willing to adopt a flexible deal structure, by becoming a minority stake holder at the global level or conducting a deal at the level of a Chinese or Asian entity. This is in the view that such approaches will better align interests between them, the respective management teams, and shareholders across Europe.


A fine balance between GDP growth, product and service quality, and sustainability will be key to China’s growth moving forward. We believe that tech-enabled innovation is likely to be integral to improved productivity and efficiencies – the two main drivers of China’s economic growth as discussed above.

Technological and critical ‘know-how’ will play into the R&D gap which will in turn help to improve innovation. We believe this will remain the focal point for Chinese investors when looking at outbound investment opportunities over the coming years.

Find all sources for this section, here >