Navigating impact of COVID-19 on trade and investment between China and New Zealand

18 June 2020

PwC

Chinese economy: recovery is underway Economic activity in China is recovering with the epidemic now largely under control inside the country (wary of 2nd wave)

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The Chinese economy shrank by 6.8% in the first quarter, the first decline since at least 1992 (when official quarterly GDP data started to be published). In recent weeks, economic activity in China has been returning to a post COVID “normal”. Both domestic supply and demand are improving. The risk of a second shock remains as overseas demand slumps and global supply chains disruption hits production.China’s National Bureau of Statistics expects positive GDP growth to be recorded in the 2nd quarter. IMF projects China to be one of the few countries in the world poised to grow in 20201.

The economy

The shifting effectsThe COVID-19 outbreak has caused a shift in consumer preferences, with strong reliance on technology. Certain sectors will benefit: healthcare, biotech and pharmaceutical, e-commerce, online streaming media, and productivity applications (e.g. remote working tools and online edtech apps). Many of these businesses have recorded a spike in customers and high market penetration rates. Shortened investment cycle and/or higher return on investment will attract more investment into these sectors.

Domestic consumption recorded 15% month on month growth in March, 6.5% in April. Decrease in monthly consumption as compared to 2019 continued to narrow from ~20% in Jan & Feb to 7.5% in April 2020. China's manufacturing PMI (Purchasing Managers Index) surged to 52.0 in March 2020 from a record low of 35.7 in the previous month2, signaling a broad stabilisation of business conditions.

Domestic consumption and production

1 Source: World Economic Outlook, April 20202 PMI index higher than 50 indicates expansion of manufacturing activities.

GDP decline in Q1 2020

-6.8%Forecast 2020 GDP growth (IMF)

1.2%

* The China’s National Bureau of Statistics do not report monthly retail sales data for January and February for both 2019 and 2020, hence they are presented together in the chart above.

Source: National Bureau of Statistics of China

Source: National Bureau of Statistics of China

PwC

Equity capital availability: ample equity capital available in the Chinese market Strong stock markets (including IPO activities) and record level of PE dry powders support equity investment activities in the medium to long term

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● China’s capital markets had suffered less volatility than their global peers during the pandemic. Shanghai & Shenzhen stock exchanges reported only 9% and 4% decrease in the Q1 2020 as opposed to over 20% decline in other major markets.

● Despite market turmoil, China saw strong Q1 2020 IPO activities in both Mainland China and Hong Kong, attributable to both strong policy support and confidence in the capital market.

Resilient Chinese stock markets Significant dry-power and also exit activity for Private Equities● Chinese PE/VC sector is well-capitalised with record levels of dry-powder from previously

raised funds. ● Top PEs, and PEs backed by SOEs, are important contributors of capital raising, whilst others

struggled to raise funds. PE industry as a whole continues to consolidate. ● Significant increase in non-RMB fund raised (by ~58%) in Q1 2020 amid difficult funding

environment in general. ● PE-based IPO activity almost doubled in 2019, partly due to the launch of China's new

Nasdaq-style tech board (STAR) in 2nd half of 2019.● Despite market uncertainties, PEs remain under pressure to deploy capital in 2020.

However, a “wait and see” approach might be taken until the market has settled and valuations have stabilised.

Chinese PE sector is estimated to be sitting on US$350 billion as of June 2019 US$350bShanghai Stock Exchange topped global listings in

terms of fundraising in the 1st quarter of 2020 #1

Mainland China IPOs recorded over 200% increase YoY in Q1 2020. 31 IPOs

RMB26b raised

51 IPOs

RMB78b raised

Q1 2019 Q1 2020

China overtook the United States as the world’s most popular venue for stock market listings in the first quarter of 2020.

Source: Dealogic, FT.com, China Securities Regulatory Commission Source: PwC China ‘M&A Review 2019 and 2020 Outlook’, PEData.com ‘China VC/PE Market Review Q1 2020’’

PwC

Investment: continuous interests in key sectors and strategic opportunities We believe there is opportunity to structure bilateral deals across NZ and China

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China overseas M&A slowing down

In Q1 2020, China overseas M&As recorded the lowest value in a quarter over the past 10 years (down 70% YoY). With the continuous impact of COVID-19, overall China overseas M&As is expected to continue the trend of slowing down for the rest of 2020.

China has become New Zealand’s 2nd largest source of capital in 2019. However, its investments in New Zealand represent less than 1% of total Chinese overseas investments.

Middle-market activities sustained

Increasing interests in NZ investment amid COVID

Over the last two to three months, we see increasing interest and enquiries from Chinese buyers. Rather than being opportunistic in the current environment, they are seeking strategic investment opportunities in NZ.

Interests are focused on New Zealand’s iconic sectors and companies with established brand and presence in Asian (particularly Chinese) market, including agricultural, dairy, nutraceutical (including Manuka Honey), food and other consumer products, healthcare.

These Chinese investors typically look to bring into play a number of strategies:● Synergies across the supply chain ● Capture growth opportunities of premium NZ

products/brands in Chinese markets● Diversification of existing business portfolio ● Build local market share through acquisitions

Common strategic objectives

Focus on key sectors

However, the decline in overall overseas M&A is more driven by fewer large or mega transactions. China’s overseas transaction volume only reduced by 20% in Q1, indicating a level of sustained activities in the middle-market (transaction size of $10m to $500m, a segment where most of the deals across NZ and China fall into), consistent with the trend seen historically with total deal volumes holding up.

1%Source: PwC China ‘M&A Review 2019 and 2020 Outlook’, Statistics New Zealand

What we are seeing

PwC

Trade: e-commerce Despite the decrease in domestic consumption as a whole, online has recorded a 5.9% growth in retail value during Q1 2020

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Source: PwC China ‘eCommerce in China - the future is already here’, iiMedia Reports

China is the largest and most innovative retail e-commerce market in the world. COVID-19 has further boosted online consumer sales, which is running at 15% above pre-crisis levels.E-commerce is not just a platform but a well-connected ecosystem, integrating everything, from brand building, marketing, payments, logistics, quality control, customer engagement to supply chain operations.Mobile is the most important device for online shoppers, with more than 80% online sales being made, particularly driven by young consumers who were born into a constantly changing digital world.E-commerce in China is evolving quickly and has reshaped the landscape of the consumer market. Chinese consumers are very digital savvy and used to adapting their own behaviours to keep up with fast-paced changes.

● Difficult for an unsophisticated consumer to tell the difference between products.

● They want to know more about the products before making buying decisions.

● They are willing to pay for the uniqueness, which enhances the consumption experience

Chinese consumers are wanting to know more

What they want to know

● Backstory to add uniqueness● Authentic, safe and traceable● Healthy and environmentally friendly

● Entered an era of experience led commerce● Communication becomes more proactive,

creating multiple “direct” channel to consumers

● Livestreaming shopping is already booming in 2019 and further boosted by COVID-19

● KOL and “group” (e.g. Wechat group) endorsement is key and becomes a sales channel

● Advanced use of data & analytics and Omnichannel

How to convey this message to consumers

● The most dynamic retail market in the world

● New ways of connecting with consumers constantly emerging in short period of time

● Highly competitive with local and international brands competing for consumer attention (average life of hottest topic is 1.5hrs) and wallet share

Fast changing ecommerce environment in China

Average spent by Alibaba Passport users on Tmall / TaobaoUS$45,000

Number of Taobao daily active users: DAU = 300m

Number of people using Taobao monthly

666 million

Average # of times a day Taobao user

opens its app 7/day 140 million hours p.a. Users watching livestream video on Taobao

Taobao GMV for FY18: RMB2,689 billion

20 millionReviews posted on Taobao per day

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PwC

New Zealand OIO approval: stricter regulatory scrutiny will become the new normCross border deal makers need to thoroughly understand local regulations more than ever before

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Source: Governments announcements

On 25 March, the European Commission issued Guidelines calling upon Member States to implement rigid foreign investment screening aimed at safeguarding EU critical companies and assets from foreign acquisitions. This applies particularly to the public health, pharmaceutical, medical research, infrastructure and biotechnology sectors. Member states including France, Spain and Italy have introduced stricter rules according in April.

More stringent regulatory scrutiny in developed countries

In May 2020, New Zealand government announced that it intends to introduce emergency legislation amending the Overseas Investment Act in response to COVID-19. Key consequence of the Bill include:

● All transactions, regardless of value, which involve an overseas party buying 25% or more of a business must be notified to the OIO.

● Notification will be made by way of a 2-5 page document providing information about the transaction, including the identity of the investor and its ownership and control, any links to foreign governments, and the nature and size of the business being purchased and the commercial rationale. There is no fee for lodging a notification.

● All applications will be triaged and purchasers will be notified within 10 working days whether the transaction will be effectively called-in under the National Interest test (and within 30 working days to 60 working days where a more detailed review is required).

● On notification, the Minister can impose conditions on, block or unwind transactions, although Treasury have stated that this will be used sparingly and is not intended to force assets to remain in New Zealand ownership.

This regime is intended to be a temporary measure only. Once the emergency regime is in place, the Minister must, at intervals that are no more than 90 days apart, review whether the emergency regime should stay in place.

The Government is moving at great speed to put this Bill in place and we expect it to come into force as a matter of urgency by mid-June.

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This regime is intended to be a temporary measure only.

The emergency regime has been in place since mid June. The Minister must, at intervals that are no more than 90 days apart, review whether the emergency regime should stay in place.

New Zealand emergency Overseas Investment Act legislation

In the past couple of months, the European Union and governments of many western developed countries have introduced stricter foreign investment screening measures in order to protect domestic businesses and assets "in a time of public health crisis and related economic vulnerability". This creates higher uncertainty and execution risks for Chinese companies looking to undertake overseas investments in the future.

EU

From 13 February, the jurisdictions of the Committee on Foreign Investment in the United States (CFIUS) was officially strengthened. Under the new regime, the CFIUS will be competent to screen non-controlling investment in critical technology, critical infrastructure and sensitive personal data businesses.

US

On 18 April, the government announced to scrutinise with particular attention under the Investment Canada Act FDIs of any value, controlling or non-controlling, in Canadian businesses that are related to public health or involved in the supply of critical goods and services to Canadians or to the Government. Investments by state-owned investors, regardless of their value, or private investors assessed as being closely tied to or subject to direction from foreign governments are subject to enhanced scrutiny as well.

As of 29 March 2020, all monetary screening thresholds triggering the requirement for FIRB approval under FATA were lowered to $0. The effect of this change is that all foreign investments (other than those exempt by the FATA) will require FIRB approval, regardless of the value of the investment or the nature of the investor.

Canada

Australia

Having OIO covering all transaction with no threshold could create unnecessary uncertainty as, based on prior experience, the OIO might not be able to handle applications in a timely manner. However, if the 10 day time limit is applied in practice and the information requirements for uncontentious deals are not onerous, the regime should be manageable.

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PwC

PwC can help

PwC is supporting many clients as they navigate through COVID-19. Some of the areas that we can help you with trade and/or investment initiatives with China are listed below:

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DealsPwC has been the number one mid-market M&A advisor in New Zealand for the last 15 years in a row and is the largest team in New Zealand providing transaction services (i.e. due diligence). Our team of bilingual “Deals” specialists have completed a number of cross border transactions between China and New Zealand. We are able to provide a seamless “one stop” service including (not limited to):

● Identifying investment, merger and acquisition (M&A) opportunities in NZ and China

● Foreign policy, laws and regulatory frameworks● M&A and capital raising: lead buyside and sellside

advisory ● Due diligence - financial, tax, legal, environmental, IT and

cyber due diligence● Transaction structuring

China market strategy (incl. e-commerce)Leveraging our strong PwC network in China, deep sector and extensive China market experience, we can help you build your strategy for China and Chinese e-commerce. We can consolidate all the strategic insight, business analysis and regional expertise you need to navigate these growing markets, with a local New Zealand team supporting to ensure that they deliver to and exceed your expectations:

● Market study and insights, including regulatory / policy environment and competitive landscape

● E-commerce: identify current presence, channel options, develop channel strategy and assist with execution

● Selection and evaluation of potential partners

Tax, Legal and othersWe provide both inbound and outbound services, supporting the entry of Chinese business or individual investors into the New Zealand market or vice versa, forming strategies that take into account cultural and demographic differences, various legal and regulatory hurdles, and best ways to structure transactions and investments to maximise profitability:

● Tax services including assistance in tax restructuring, managing compliance and structure for taxation

● Setting up business in China as a NZ organisation● Setting up business in New Zealand as an overseas

organisation● Legal advisory● Wage subsidy evaluation● Immigration services

Get in touch

Peggy LiaoDirectorCorporate Finance | DealsAucklandM: +64 27 913 4426E: peggy.j.liao@pwc.com

Tom LoganPartnerPwC LegalAucklandM: +64 27 531 9282E: tom.x.logan@pwc.com

Wicki HuangPartnerDeals & China MarketAucklandM: +64 22 067 0096E: wicki.w.huang@pwc.com

Beini GuoManagerCorporate Finance | DealsAucklandM: +64 21 876 064E: beini.x.guo@pwc.com

Members of PwC China Business Team Subject Matter Expert

Please visit our website for more information and to find our key contacts for the PwC Asian and China Business Team: Asian Markets at PwC

pwc.co.nz

Thank you

This content is accurate as at 18 June 2020. This content is for general information purposes only, and should not be used as a substitute for consultation with our professional advisors. If you wish to understand the potential implications of COVID-19 for your business, please get in touch. To find an advisor and to see more of our general guidance for businesses, please visit our COVID-19 webpage at www.pwc.co.nz/covid-19

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