Domestic deals power surge in Chinese M& A

( FT ) - Merger and acquisition activity in China continued to increase rapidly this year thanks to a sharp rise in domestic deals as mainland companies bought local rivals to expand.

The value of domestic M& A deals in China, including those in Hong Kong and Macao, in 2007 is up 53 per cent from last year to $50.6bn, according to a report by PwC.

The volume of deals grew45 per cent to 987 transactions, twice as much as foreign-invested M& A deals. Domestic transactions are expected to continue to dominate deal activity next year.

"Domestic deals are driving the increase in M& A because Chinese companies are looking to expand and grow market size," said David Brown, transactions partner at PwC Hong Kong.

China's strong economic growth has spurred local companies to develop new markets and increase the scale of their operations. The government is also supportive of domestic deals. Financial services, real estate, manufacturing and mining have been the most active sectors.

Among the largest transactions, Beijing Enterprises Holdings, the Hong Kong-listed investment arm of the capital's city government, acquired Beijing Gas Group in April from its parent for about $1.5bn. Aluminum Corp of China in October paid about $1bn for a 49 per cent stake in Yunnan Copper Group.

The value of outbound deals from Chinese companies has also more than doubled in the first 11 months of this year to $16.4bn as the country's global ambitions grow, although mainland groups mainly took minority stakes in foreign companies.

Last month, Ping An Insurance, China's second largest life insurer, paid $2.7bn for a 4.2 per cent stake in Fortis, the Belgo-Dutch banking and insurance group. In October, Industrial and Commercial Bank of China, the country's largest lender, struck a deal to pay $5.56bn for a 20 per cent stake in Standard Bank in South Africa.

PwC said it was hard to speculate whether Chinese companies had the confidence or need to take controlling stakes in overseas companies yet but it expected a few headline deals still to come thanks to mainland firms' huge war chest.

The value of private equity investments has almost doubled from $5.7bn in 2006 to $10.6bn in the first 11 months this year.

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