A confluence of government policy, record corporate cash piles, and an urgent need to escape cutthroat price wars has pushed China into a record wave of mergers and acquisitions ( M&As ). The surge signals opportunities for both industrial upgrading and investors, and it is already attracting the attention of buyout funds.

The policy shift comes as the central government embeds its “financial superpower” ambition in the 15th Five-Year Plan ( 2026-2030 ), with a focus on industrial upgrading and resource reallocation.

Market experts have coined the word “involution” for self-defeating, margin-killing price wars, which constitute one of the country’s biggest economic headaches. This has resulted from slowing economic growth and an increasing number of market players. Fragmentation breeds involution.

In such a situation, M&A has become the tool of choice for consolidating markets and moving up the value chain. According to Song Zhiping, president of the China Association for Public Companies and chief expert at the China Enterprise Reform and Development Society, it is a good time for China’s M&A sector, amid the global consolidation trend and government support via six new measures encouraging listed companies to use M&A as a growth lever.

Since the measures were released late last year, the number of disclosed M&A deals in China has increased by about 10% to almost 5,000. Big-ticket targets cluster in next-gen IT, advanced manufacturing, and new materials, while financials are also seeing megadeals. Guangdong leads in case count, followed by Zhejiang, Jiangsu, Beijing, and Shanghai. 

Smarter choice

Meanwhile, the tightened regulatory environment over the past two years has increased the demand for M&As. In a low-yield era, relying solely on dividends is no longer the optimal way to reward shareholders; achieving external growth through M&A has become a smarter choice for listed companies with huge cash piles.

Buyout funds are piling in. “Ten years ago, we struggled to find good opportunities in China, but this year we are refocusing on China,” says Li Zhen, partner at China-focused private equity firm FountainVest. As of the end of November, 29 new buyout funds had been set up in China, up 70% from 2024, with assets under management totalling over 100 billion yuan ( US$14.2 billion ), according to market database and research platform CVSource. Six of them exceed 10 billion yuan each, with the largest hitting 30 billion yuan.

Buyout funds acquire target companies, improve the balance sheet, and enhance operations before selling to a strategic buyer or relisting. The model demands predictable cash flows, which are mostly likely to be found in traditional industries. Start-ups from new sectors such as tech may promise massive returns but can bleed cash for years. Identifying strong targets in a relatively traditional industry with explosive opportunities is the key challenge for buyout funds.

As many Chinese enterprises pursue global expansion, buyout fund managers have seen more cross-border M&A deals. Such deals used to be driven by two classic rationales, namely importing technology and securing natural resources. Technology-import deals are losing appeal because the technologies China still needs are often subject to foreign export controls. Resource-related acquisitions – buying mines, oil fields or other raw-material assets in developing economies – remain popular and are expected to keep expanding.

Domestically, funds anticipate the next wave of opportunities to arise from industrial consolidation. By sponsoring roll-ups of fragmented competitors, they intend to create national champions capable of influencing, rather than accepting, market prices. This is in line with regulatory guidance. There may also be opportunities in relay-type investments, meaning injecting growth capital into companies whose IPO timelines have been deferred.

Looking ahead, fund managers agree that current market conditions offer a favourable entry point for buyout capital. Domestic assets are priced at or near cyclical troughs, with numerous high-quality enterprises trading at steep discounts. The M&A market is expected to continue growing as the supply of capital remains abundant.