Mergers and acquisitions (M&A) are joining the mainstream of foreign investment in China along with foreign direct investment, said JPMorgan Chase Bank.

This year has been a good one for M&As in the nation, with three of the five biggest deals of the past four years taking place in 2004.

The latest case, the smallest of the five, involved US$737 million when Anheuser-Busch bought into Harbin Brewery Group. And more are in the pipeline over the next 12 to 18 months, said Leon Meng, managing director of Asia-Pacific M&A Practice at JPMorgan.

"M&A is gaining momentum in China. This year will surpass 2003's US$35 billion in terms of volume and set a record high," he added.

China has closed M&A deals worth US$23 billion in the first half of this year, already accounting for 65 per cent of last year's total.

The government's accelerated sale of State-owned assets is one of the driving forces behind this trend, said Meng.

M&A is also becoming an increasingly popular way for major domestic players to enhance their competitiveness by forging partnerships with strategic foreign investors.

"We've seen increasing number of mutually beneficial deals. Chinese companies particularly want to obtain the latest technology and management skills by selling stakes to strategic foreign partners, as a way of expanding," Meng said.

More Chinese firms will also sell off their non-core assets in order to become leaner in order to meet the challenge of increased competition resulting from WTO membership. This will result in more targets for M&A.

Further breakthroughs are expected as restrictions on the capital market continue to be lifted, Meng added.

Half of last year's M&As were connected party transaction, mostly foreign listed companies acquiring assets from their parent companies. Cross-border deals accounted for 19 per cent, with 3 per cent contributed by Chinese enterprises buying into foreign firms.

Brian Gu, vice-president of JPMorgan's Asia Pacific M&A Practice, said that cross-border M&As will increase their share of the total volume as China's economy continues to open and multinational firms increase their investment here.

Manufacturers of consumer goods will continue to be the most attractive sector on multinational firms' shopping lists, especially companies with popular brands, a large manufacturing capacity, sound distribution network and a good market share.

"Due to the policy restrictions, some most attractive sectors, such as auto, finance and media still limit their foreign stakes to less than 50 per cent," he said.

One small but potentially large source of M&A deals is Chinese enterprises investing in foreign countries.

Gu said some Chinese enterprises had approached JPMorgan for overseas acquisitions, but there are tremendous difficulties and challenges.

He said Chinese enterprises still have a lot to learn about how to manage an overseas company and adapt to a new environment.

A lack of a global vision and accountability, as well as the government controls on fund flows are also obstacles for Chinese companies' overseas expansion.

(China Daily July 20, 2004)