Mergers and acquisitions by foreign investors of Chinese companies will increase in the future to become the main method of foreign investment in the country, said a Shanghai municipal government official at an M&A forum Wednesday.

"Mergers and acquisitions will gradually become the primary form of foreign investment in Shanghai and China as a result of globalization," said Liu Jinping, vice director of the city's Foreign Economic Relations and Trade Commission, at the 2003 Foreign Acquisition Forum in Shanghai.

Compared with setting up new factories, acquiring local companies would make multinationals expand more rapidly to meet their global strategy, he said.

So far, the value of mergers and acquisitions makes up only a tiny part of the US$448 billion in foreign direct investments in China from 1970 to the end of 2002.

Last year, FDI in China totaled US$55 billion with M&A accounting for only 3.9 percent of the total and the figure for 2001 was 5 percent, according to United Nations statistics.

For the first three quarters of this year, China reported the total value of M&A at US$24 billion, according to Thompson Financial.

However, only 16 percent of the value of the M&A involved foreign investors, with the rest of the transactions involving domestic firms.

"That is why the foreign merger and acquisition has huge growth potential," said Liu.

Liu also noted that Shanghai will see more M&A as more than 30 foreign law firms and the world's four biggest accounting companies have all set up operations in the city to take advantage of the potential market for M&A work.

"We will work together with the city's State-owned Assets Supervision and Administration Commission to short-list some companies which could be ripe for a foreign merger and acquisition," said Liu, without specifying the names.

However, bureaucratic red tape still poses obstacles to the development of M&A, which takes longer to be approved than setting up a new foreign-invested firm.

(Shanghai Daily December 11, 2003)