Chinese M&A activity remained subdued in the first half of 2026, with dealmakers’ early-year optimism tempered by a more challenging operating environment.

Transaction value for China and Hong Kong M&A totalled USD 163.8bn in 1H26, down 48% year-on-year, according to Mergermarket data.

“At the start of the year, sentiment was actually quite positive,” said Samson Lo, global banking, co-head of M&A advisory, Asia Pacific at UBS. Geopolitical uncertainty, longer regulatory approval timelines and an increasingly unpredictable financing environment caused many corporates and investors to hold back, particularly on larger and more complex transactions, Lo added.

Despite the broader weakness, capital continued flowing into sectors aligned with China’s long-term industrial agenda. Technology and healthcare were the only major sectors to record year-on-year growth.

The CNY 50bn (USD 7.4bn) fundraising by Hangzhou DeepSeek Artificial Intelligence, the second-largest transaction announced in 1H26, underscored investors’ continued appetite for AI-related assets.

“Over the next 12 to 18 months, we expect to see consolidation among smaller and mid-sized AI companies in China as larger technology groups look to strengthen their AI capabilities through acquisitions,” Lo said.

Sponsors await fresh capital

Private equity activity weakened even more sharply than the broader M&A market.

China buyout value plunged 99% year-on-year to USD 361m across six transactions, while sponsor exits declined 39% to USD 1.2bn.

The slowdown appears to reflect the industry’s fundraising cycle rather than weakening investor appetite.

According to Eric Xin, senior partner at Trustar Capital, China-focused US dollar funds largely completed deploying capital last year as vehicles raised in 2020 and 2021 approached the end of their investment horizons, helping drive the surge in buyout activity seen in 2025.

By contrast, many renminbi-denominated buyout funds remain in fundraising mode, leaving limited fresh capital available for acquisitions, Xin added.

At the same time, strong investor demand for AI and semiconductor companies has diverted capital towards pre-IPO and IPO opportunities, widening the valuation gap between hard-tech assets and traditional buyout sectors such as consumer, manufacturing and services, Xin noted.

Xin expects buyout activity to recover gradually in the second half as newly raised capital begins deploying and more long-term institutional capital returns to the market.

While new investments have slowed, sponsors are increasingly focused on harvesting mature assets.

Many investments made during the 2020-2021 period are now reaching maturity. Our focus today is on harvesting earlier investments, and I expect many other GPs are in a similar position, according to James Tam, partner at Bain Capital.

Hong Kong IPO revival lifts exit prospects

A more active Hong Kong equity market provides another viable exit route for private equity, Tam said. “What matters is having optionality, and today’s IPO market gives sponsors another credible path to monetisation.”

Bain recently exited WinTriX’s China operations and partially monetised its investment in Vitalink while retaining a stake ahead of the company’s planned Hong Kong IPO, illustrating how sponsors are increasingly combining trade sales and capital markets to maximise returns.

The improving IPO market has also reshaped negotiations by raising sellers’ expectations. “Sellers are increasingly benchmarking themselves against recently listed companies, which has made M&A negotiations more challenging than they were a few years ago, “ added Lo of UBS.

Outbound shines

Outbound M&A was one of the few areas to buck the broader slowdown.

Chinese outbound M&A surged 151% year-on-year to USD 28.4bn in 1H26, extending the recovery that began in the second half of last year.

Activities have become increasingly concentrated around strategic sectors aligned with China’s industrial priorities.

Chinese buyers remain active in the consumer sector, especially for European consumer brands, Lo said. At the same time, natural resources and critical minerals will continue to be a key outbound investment theme, particularly for Chinese SOEs investing across Latin America, Australia and Europe.

AI-related cross-border transactions, however, are likely to remain selective because of regulatory sensitivities, Lo added.

Frank Bi, Asia head of corporate transactions at Ashurst Perkins Coie pointed out that new PRC rules (Regulations of the State Council on Outward Investment) which took effect on 1 July 2026 will have a significant impact on M&A in sensitive industries. Outbound investment risk will need to be assessed at a preliminary stage.

Thinking outside the box

Lo believes several large domestic transactions, particularly SOE-led consolidations, are already progressing through regulatory processes and could emerge later this year.

Thinking beyond near-term recovery, sponsors also believe investors should broaden how they think about China opportunities.

“We no longer restrict ourselves to looking at China as just China,” Tam said. “Increasingly, we’re investing alongside Chinese companies as they expand overseas or underwriting multinational businesses with significant China operations. Those are effectively extensions of China deals.”

He pointed to Bain’s acquisition of Japanese personal care company FineToday, whose investment thesis was heavily underpinned by its China business, as well as the firm’s investments supporting the overseas expansion of Chinese companies through Bridge Data Centres and EcoCeres.

The next phase of China’s M&A market may therefore be defined less by where deals are executed than by where the underlying growth comes from, Tam added.