Mergers and acquisitions in China by domestic and foreign investors fell to a five-year low in 2012, but the number of deals this year will rebound this year, global accounting and consulting firm PricewaterhouseCoopers predicts.

Last year, there were 2,953 deals to buy stakes in Chinese companies. The value of that M&A activity was $97.1 billion, a 28-percent decline from 2011, according to the PwC report released on Wednesday.

Counting activity conducted abroad, there were 4,115 M&A deals related to the Chinese market totaling $199.5 billion, down 9 percent from the previous year.

In addition to strategic M&A, the value of deals by financial buyers - private-equity and venture capital investment firms - also declined, but only deals from China into other markets saw growth.

Although the number of outbound deals from the Chinese mainland declined to 191 in 2012 from 206 in 2011, their total value rose 54 percent to a record $65.2 billion. That was more than a third of all global M&A activity measured by value, the PwC report said.

On Wednesday, Chinese conglomerate Sinochem Group announced an agreement to buy a 40-percent stake from Pioneer Natural Resources Co in the Wolfcamp shale-based natural gas field of western Texas for $1.7 billion. Sinochem will pay $500 million in cash to explore 33,500 hectares and the remaining $1.2 billion by taking on Pioneer's share of future drilling and upkeep costs.

The move is believed to be Sinochem's first into the booming US market for unconventional sources of gas. Two Chinese energy giants have also invested in the sector. China Petrochemical Corp, also known as Sinopec, agreed last year to buy $2.5 billion worth of shale-gas assets in Ohio, Michigan and other areas from Devon Energy Corp. China National Offshore Oil Corp reached a similar deal, worth $2.2 billion, with Chesapeake Energy Corp in 2010 and a smaller acquisition in 2011.

"Global economic uncertainty and the soft landing of the Chinese economy may be the main reasons behind the five-year low," said Leon Qian, head of transaction services at PwC Northern China.

He said domestic and foreign-inbound M&A activity was worse than that following the global financial crisis. The earlier period was helped by the Chinese government's 4 trillion yuan ($605 billion) stimulus package in late 2008.

"As the direction of the Chinese economy becomes clearer, industry consolidation accelerates, domestic leadership changes take effect, and foreign economies start to emerge from their stressed positions. This should result in a strong rebound in China domestic and foreign-inbound strategic deals in 2013," Qian said.

According to the report, Japan was the most active foreign-inbound M&A investor in China for the second consecutive year, but the number of deals involving Japanese investors declined 30 percent, mainly because of the Diaoyu Islands dispute. The biggest deals in 2012 still came from the United States and Europe.

"We see many more deals in the pipeline and expect this growth trend to continue strongly with another record year in 2013," said Edwin Wong, PwC China's head of outbound investment.

The report also said private companies took on larger deals and will be the key drivers of future growth in China's outbound M&A activity.

"The growing activity of private-sector buyers in acquiring industrial technologies and consumer-linked businesses overseas is an important trend. Many of these deals are aimed at bringing advanced Western technologies, know-how, intellectual property and brands back for use in the Chinese domestic market," Wong said.

The report said private-equity and venture capital investors have emerged as important sources of financing for the liquidity-starved private sector in China.

New deals and exit activity will accelerate strongly from the second quarter of 2013, the report forecast, as pricing expectations are adjusted, companies release 2012 earnings results, initial public offerings resume and China's leadership transition takes effect.

Private-equity deal activity, which consists of new investments and exits through IPOs as well as M&A - will reach record highs in 2013 or 2014, PwC added.

Joseph Boris in New York contributed to this story.

caixiao@chinadaily.com.cn

(China Daily 01/31/2013 page1)