Chairman of China's Zhejiang Geely Holding Group Li Shufu and CFO of Ford Motor Co. Lewis Booth sign a deal on Geely's takeover of Sweden’s Volvo Cars in Goteborg, Sweden, on March 28, 2010 (XINHUA)

While several decades of rapid economic growth has made China a preeminent participant in global commodities trade, the fast-growing overseas merger and acquisition (M&A) activity of companies from China is laying the foundation for the country to become a major source of outbound investment.

Figures from the Ministry of Commerce (MOFCOM) show that in the first quarter of this year, the value of overseas M&As by Chinese companies hit a record high of $16.96 billion, soaring 277 percent from the last quarter of 2015 and 120 percent year on year. Although the growth of overseas M&As between April and June of this year slowed on a quarterly basis, the year-on-year growth still topped 30 percent, indicating growth in Chinese investors' ambitions for foreign assets.

But, however large one's appetite is, sooner or later one is bound to have had one's fill. Following the high growth of overseas M&As during the first half of this year, Chinese companies currently seem hesitant to venture abroad. In August, the number of overseas M&A deals dropped for the second consecutive month to 68, the second lowest of monthly figure so far in 2016.

The Chinese Government has relaxed examination procedures and offered credit support to overseas M&As. Furthermore, the tightening of credit in China can be discounted as a factor contributing to investors' hesitancy. The recent drop-off has occurred simply by virtue of the nature of outbound investment, which is nowhere near as stable as foreign trade. Faced with formidable uncertainty, investors usually spend lengthy periods investigating, negotiating and making decisions before completing overseas deals. Typically, M&A activity grows explosively for some time and then remains stagnant for a while.

While many companies from China have a strong appetite for foreign acquisitions, they have to act cautiously. To ensure success in their overseas M&A endeavors, the companies must first select appropriate targets. In the past, they would choose firms on the basis of their proprietary technologies, holding of resources, market share and partners. But, as Chinese companies have become stronger, they have turned to seeking assets that provide a more suitable match to their area of expertise. Consumer electronics and home appliance company Haier Group, for example, chose GE's appliance business among various potential acquisition targets.

However, foreign purchasers often have to obtain permission from the authorities of the jurisdiction in which their target is based. In the past, the respective takeover bids of the China National Offshore Oil Co. Ltd. and the Aluminum Corp. of China Ltd. for Unocal Corp. in the United States and multinational Rio Tinto both failed to gain approval from the relevant governments.

Companies from China looking to expand overseas also need to time their actions carefully. Undoubtedly, when companies are performing well, acquirers have to pay comparatively high prices. Conversely, when a firm's shares can be snapped up at bargain prices, buyers must take more risk in making purchases.

In recent years, outbound investment around the world has experienced serious fluctuations. In 2016, the value of cross-border M&As worldwide is expected to decline by 10-15 percent from the previous year due to the weak global recovery, economic difficulty in nations that rely upon primary commodity exports, and stricter examination procedures by governments. Under such circumstances, expecting Chinese companies' overseas M&As to continue soaring would be unrealistic, to say the least.

All things considered, while cash-flush Chinese firms still have hearty appetites for acquiring foreign assets, in order to ensure successful acquisitions, they would be well advised to take a wait-and-see approach during certain periods.

This is an edited excerpt of an article published in Economic Information Daily. The author is a researcher with the Chinese Academy of International Trade and Economic Cooperation

Copyedited by Chris Surtees

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