China's mergers and acquisitions (M&A) market saw a modest pick-up in domestic deal activity in the second quarter after a steep decline in the first three months of 2009, professional services firm PricewaterhouseCoopers (PwC) said.

A PwC report released yesterday showed that domestic transaction volumes in the second quarter increased by 32 percent, to 811 deals worth US$28.3 billion, from 616 deals worth US$17.6 billion done during the first quarter.

Domestic transactions, whose volumes saw an over 35-percent increase from the first quarter to the second, contributed to an all-time high of 87 percent, or 708 deals, of the total volumes during the second quarter.

"The turnaround in domestic deal activity levels was mainly due to the improving confidence arising from the central government's stimulus measures and ongoing policies to support consolidation in industries like cement, steel and financial services," the report said.

However, overall M&A activity in the first half still sank by 21 percent to 1,427 deals from 1,812 in the same period last year, with activity levels down for both domestic and foreign deals, according to information provider Thomson Reuters, which provided data for PwC's report.

Foreign investors saw the sharpest decline in activity since 2007, from 322 deals in the second half of 2008 to 200 in the first six months of 2009.

"It indicates that China's economic recovery has been quicker than most other countries," said Benjamin Ye, PwC's transactions partner based in Shanghai, attributing the drop in foreign-backed deals largely to the overseas companies' low visibility over global earnings prospects at the beginning of the year.

Although less impacted, on a year-on-year basis, the total domestic-to-domestic deal volume fell 16.8 percent to 1,227 in the first half of 2009 from 1,475 made in the same period of last year.

Over the first six months of this year, the largest announced domestic transaction was Ping An's acquisition of 30 percent of Shenzhen Development Bank's shares for US$3.2 billion, while the largest outbound investment was the US$8.9-billion takeover of Swiss oil and gas explorer Addax Petroleum by domestic oil refiner Sinopec.

"Outbound investment activity remains a bright spot for China's M&A, and we've seen a trend that investors' focus started to shift from the traditional energy industry to some non-traditional sectors like manufacturing," said Wang Xiaogang, PwC's transactions partner.

The outbound deal activity increased by 10 percent in the first-half over the same period last year.

In addition, financial services, which were largely independent from its subdued global peers, remained the most active sector by deal volume and value terms from January to June, when 202 transactions worth US$10.6 billion were inked. The real estate sector also saw a strong pick-up with 148 deals.

"Domestic deal activity is likely to recover to 2008 levels during the remainder of 2009 because of China's better-than-expected GDP figures amid the stock market gains, and the resumption of IPOs," said Ye, adding that foreign corporate and financial investors would remain more cautious. "We don't see a return to 2008 levels of activity until 2011 for foreign buyers," he said.

(China Daily July 28, 2009)