By Vicki Kwong
HONG KONG, Jan 22 (Reuters) - Hungry for foreign capital and keen to reform its bloated state sector, China is tipped to be one of Asia's busiest markets for corporate deals this year.
"Foreign investment has been and will continue to be a driving factor (in China)," said Gordon Paterson, head of mergers and acquisitions in the Asia Pacific region for Citigroup's Salomon Smith Barney.
Once fiercely protective of pillar industries such as power and banks, China is opening more doors to foreigners with capital and know-how, facilitating dealmaking.
"If you look at what (China is) doing, they're actually relaxing the hard wiring," said Nick Rees, a Hong Kong-based managing partner at Linklaters, one of the region's most active law firms in M&A transactions.
"And all of that is just making the ability to do deals, and the potential opportunities, much greater," he said.
And as some of its firms mature, more Chinese companies are expected to make overseas acquisitions.
China's financial services sector will continue to draw foreign capital, following a year that saw banking giant HSBC and private equity fund Newbridge Capital taking stakes in domestic firms, bankers said.
HSBC, for example, is reportedly in talks with the Bank of Communications about taking a 15 percent stake in China's fifth-largest commercial bank.
"Across the board, they're very much looking at having foreigners come in, providing equity, providing know-how to facilitate growth of the financial services sector in China," said Salomon's Paterson.
Chinese banks are trying to shed massive bad loans and improve risk controls in the face of growing competition after it joined the World Trade Organisation in late 2001. China's overseas counterparts are more than happy to help, given that the country holds an estimated US$1 trillion in personal savings.
China's booming car industry will also lure global industry giants seeking growth. General Motors Corp recently signed a deal to invest in a fourth auto plant in China, doubling its production capacity in the world's fastest growing auto market.
Overall, multinationals across different sectors will want to increase their exposure in China, bankers say.
"We can expect more deals like Anheuser-Busch increasing its stake in Tsingtao Brewery and Alcatel taking control of Shanghai Bell," said Harry van Dyke, head of M&A for Morgan Stanley in Asia Pacific, referring to recent deals involving foreign firms investing in China.
CLEANING UP
China's move to revamp inefficient state firms, which could involve the sale of assets or changes in ownership, will also buoy M&A activity, bankers said.
Wallace Ching, director of private equity at Standard Chartered Plc , expects the move towards private ownership to continue.
"Whether it's listed companies or those that are not listed, this trend will prevail," he said.
In the next three to five years, many state firms could be sold through management buyouts (MBOs) where company executives acquire control, Ching said.
Still, Chinese M&A activity is expected to remain dominated by related party transactions, such as China Mobile (Hong Kong)'s US$10.3 billion acquisition of cellular networks from its parent last year.
The deal helped put China in the top spot for Asian M&A deals last year with a total volume of US$25.07 billion, according to market research firm Thomson Financial. That's still a small amount compared with last year's $1.2 trillion global total, although as global dealmaking has withered, China is seen as a bright spot for fee-hungry bankers.
In the near term, bankers expect more asset injection deals as China continues to reorganise and develop key sectors.
In the oil sector, which has seen industry giants CNOOC Ltd and PetroChina making overseas acquisitions in the past year, the trend will continue as China looks elsewhere to meet voracious energy demand at home.
"If you're talking large transactions, natural resources is the most obvious place given the levels of oil imported into China and the financial strength of major Chinese producers," said Salomon's Paterson.
Outbound investments could also increase in China's crowded home appliances industry where Haier Group, the country's largest refrigerator maker, has already ventured abroad.