China's outbound mergers and acquisitions (M&A) will maintain its ambitious growth this year, with deals for energy and resources continuing to dominate.

Companies may increase overseas mergers and acquisitions by 40 percent this year as Chinese buyers grow in confidence, said PricewaterhouseCoopers (PwC), the industry-focused advisory.

With the global financial crisis making assets abroad more attractive, the value of Chinese companies' M&A outbound deals in 2009 may be three times that of 2008, said a PwC report.

The resources accounted for two-thirds of all China's deals overseas last year, Ed King, head of M&A in Asia Pacific for Morgan Stanley, was quoted in the Wall Street Journal as saying. Iron ore, copper, coal, nature gas and oil are critical to fuel China's growth, he said.

"China wants to find resources to secure raw material supplies, and the government is approaching Chinese companies and large banks, such as ICBC, to be more active overseas," said Roger Groebli, executive director of LGT Capital Management in Singapore.

Outbound activity is growing strongly, with deal volumes up more than 50 percent in the second half of last year compared to the two previous half-year periods, said PwC.

The largest deal was the US$7.3-billion bid by Sinopec for Swiss Addax Petroleum in the first half of 2009. Three other deals announced in the second half were Yanzhou Coal Mining Co. Ltd's US$2.9-billion acquisition of Australian Felix Resources Ltd; PetroChina's US$1.7-billion investment for a stake in Canadian Anthabasca's oilsands assets; and China Investment Corp's US$1.58-billion for 15-percent stake in United States-based power firm, AES Corporation.

"But the value of outbound deals is still only around a third of the value of domestic and inbound transactions, and it emphasizes again that the majority of outbound transactions is still in the energy and resources space. There is a lot of room for growth in outbound deals," said Wang Xiaogang, a partner at PwC China.

Industry insiders said Chinese companies could face challenges in fostering overseas M&A from the sell side.

Recent deals include Wuhan Iron and Steel Group's US$400-million investment for a 21-percent stake in Brazilian iron ore miner MMX Mineracao e Metalicos SA, which was followed by a US$247-million investment in Australian iron ore firm Centrex, and the acquisition of a 15-percent stake in Aquila Resources by Baosteel, China's largest steel mill.

Wuhan Steel in September sought to invest in South Australia but faced difficulties as the mines are near a missile testing range.

Insiders say relations between Chinese investors and Australia have always been complicated. Australian mining companies welcome Chinese investors to satiate their capital needs, but many Chinese firms are running into local obstacles.

Zou Weimin, chairman of the Metallurgical Corporation of China Overseas Ltd, said he did not think the Australian government has a favorable attitude toward Chinese companies investing in the nation's mines.

Another major risk for Chinese companies in fostering overseas M&A deals is the insufficient risk analysis capabilities, particularly in financial and legal aspects, said Wang.

"Integrating the business after an M&A is also a daunting task for Chinese companies," he added.

(China Daily January 12, 2010)