Multinational companies spent more than $60 billion on new businesses and joint ventures with Chinese companies in 2004. Cross-border mergers and acquisitions, by contrast, have yet to induce anything like the same level of investment fever. Inbound cross-border M&A deals were worth less than 12 percent of total foreign direct investment and individual deals have been small. By comparison, among the ten countries, apart from China, that attract the greatest amount of foreign capital, the average ratio of inbound M&A to foreign direct investment was 47 percent in 2004.

China's weak M&A market might in part be a legacy of a time when foreign investment was restricted largely to joint ventures. Now, though, the limitations on investment in many industries are being removed, and cross-border M&A activity is poised to increase. State-owned enterprises are cleaning up their asset portfolios and improving standards of disclosure, making them attractive targets for foreign investors. A number of private companies better managed than their state-owned peers are also emerging as candidates. In addition, the overcapacity resulting from China's excessive investment in fixed assets suggests that local and multinational companies could pick up assets and businesses inexpensively when the inevitable restructuring takes place. The automotive...