China remains the main focus for foreign M&A investors

China maintained its magnetism for international companies last year, attracting almost $35 billion of new inward investment, according to analysis by international law firm Freshfields Bruckhaus Deringer.

Despite political uncertainties caused by the leadership handover, a spate of accounting scandals and anxieties about economic growth, investment into China rose 3% compared to 2011, reaffirming the country’s position as “the prime investment hotspot among the world’s key growth markets” during 2012.

It’s the third time during the past five years that China has been the most sought after investment destination.

“2012 turned out to be a more encouraging year for deal making, especially in the high-growth markets in Asia where we saw several significant M&A transactions announced during the year,” said Freshfields’ Asia managing partner Robert Ashworth.

“Activity levels in China, in particular, rebounded well, with another solid increase to $35 billion in aggregate cross-border deal activity recorded,” he added.

After China came Mexico ($25.6 billion) — almost entirely due to a $20 billion acquisition by Anheuser-Busch InBev — then Russia ($18.6 billion), Brazil ($18.2 billion) and Indonesia ($13.7 billion).

By deal volume, China also took the top spot with 598 transactions, followed by Russia in second place with 384 deals.

The value of global M&A investments targeting the world’s key growth markets surged by 5% during 2012 (to $162.4 billion) compared to the previous 12 months. It followed a decline of almost 25% the previous year (2011 compared to 2010).

Activity was dominated by acquisitions in the banking, food and beverage, metals and mining, and insurance industries, accounting for almost 45% of total investments.

The US was the most acquisitive nation in the growth markets. In fact, it committed the most investment in these markets since 2007, an increase of almost 70% on the previous year to more than $13 billion.

It was followed by Belgium (because of the Anheuser-Busch InBev deal), Hong Kong and Singapore. By volume, Hong Kong ranked in second place with 324 transactions.

“Looking ahead to 2013, many corporates see the higher growth markets as their best option for securing longer term increases in productivity and profitability,” said Ashworth.

“Despite continuing pressures in global markets, 2013 has started well and we expect to see yet higher levels of M&A deal flows in Asia this year across most sectors,” he said.

Separately, last week PricewaterhouseCoopers (PwC) published a guidebook to foreign business and investment in China, that gathers insights and perspectives through interviews with dozens of the firm’s leading China-based practitioners.

“With the current economic situation and change in leadership, we’re seeing an increasing liberalisation of the China market to foreign investment,” said Frank Lyn, PwC China and Hong Kong managing partner.

“[And] as multinational businesses shift their focus from China’s emerging labour pool to its emerging middle class, now is the time to step up your China strategy and capitalise on new market reforms.”

Rapid changes in demographics and market forces are opening up exciting new sectors and opportunities that would not have been believed possible a few years ago, much less open to foreign investment.

PwC lists several reasons for the changes: an aging population, rising wealth, changing consumer attitudes, rising environmental awareness, greater mobility, urbanisation and shrinking household sizes.

“The agenda for China’s new leadership is to encourage more private investment and to nurture the growth of the private sector,” argued PwC. “It is also committed to opening up new markets and sectors to foreign investment.”

Freshfields’ analysis selected the 24 economies designated as emerging and developing by the IMF: China, Brazil, Russia, India, Chile, Indonesia, Mexico, Turkey, South Africa, Malaysia, Poland, Argentina, the Philippines, Venezuela, Thailand, Peru, Bulgaria, Romania, Estonia, Lithuania, Hungary, Ukraine, Pakistan and Latvia.