Chinese outbound investments are likely to soar, given the particularly strong Chinese appetite in the natural resources and energy sector.

Paul Chow, an M&A partner at Linklaters in Beijing which advised ICBC on its US$5.5bn acquisition of a strategic interest in South Africa's Standard Bank, told ALB that China’s outbound investment will “accelerate”.

“A large proportion of the domestic banks’ foreign reserves, accumulated through recent IPOs and recapitalisations, are US-dollar based. As the US dollar has depreciated, the banks have an incentive to convert this cash into assets and, increasingly, assets to be found overseas,” said Chow (pictured). “The RMB gaining strength over the dollar is, in parallel, also making foreign investment easier.”

In the latest figures from Thomson Reuters Deals Express, China’s Cross Border Outbound acquisitions rose to US$45.2bn so far this year from 129 deals, compared to just $7.6bn from 111 deals for the same period in 2007.

The top deal was Aluminium Corporation of China (Chinalco) and US aluminium producer Alcoa’s acquisition of a 12% stake in Rio Tinto for US$14.2bn in February (2008). The materials industry registered a high growth as the values of Chinese Cross Border Outbound acquisitions in this sector had a rank value of US$15.9bn from 27 deals so far compared to US$1.23bn from 29 deals in the same period last year.

The energy and power industry also saw high growth in both the value and number of deals cut in Chinese outbound acquisitions. The two industries that registered negative growth were the retail and high technology industries.

“The trend of investment in the natural resources sector is set to continue as the PRC requires natural resources to feed its manufacturing base. Previously, China obtained access to a stable supply of materials via long-term contracts. Now why not take an interest in the source itself?” said Seung Chong, an M&A partner with White & Case in Hong Kong.

Seung, who has recently published a book examining the issues arising from M&A transactions in China, noted that examples of PRC outbound investments in the natural resources sector include investments in Chile (copper), Peru (zinc), Kazakhstan (oil) and Australia (bauxite, iron ore and uranium).

“Another interesting trend to note is that PRC companies are sourcing natural resources from countries where US or European companies are reluctant to invest,” said Seung.

Hong Kong is the most active target of Chinese acquirers followed by UK and Singapore. In March, SinoSing Power, a subsidiary of China Huaneng Group, China’s largest independent electricity provider, paid US$3bn for Singaporean electricity company Tuas Power.

Chinese companies that take the long view and secure the sources of natural resources to sustain the country’s economic growth and expand its international distribution networks also thrive with the support of the Chinese government.

“The PRC government is encouraging its companies to go global. Encouragement comes in different forms such as quicker regulatory approval and possibly financial support. To date, much of the cross-border M&A has been led by state-owned or semi state-owned enterprises,” said Chow.

In addition, people have become much more sophisticated and sensitive to political implications. As a result, recent deals are usually non controversial – for example, acquisition of a non-controlling stake – or where local government is in full support – particularly of acquisitions in Africa.