Deloitte Australia Chinese Services Group leader Keith Jones said the Borderless, Boundless: 2011 Greater China Outbound M&A Spotlight revealed that energy and resources projects accounted for almost a third of China’s outbound investments in 2010.

The total energy and resources deal value for the year was $49 billion, 31% of which was invested in acquiring Australian energy and resource assets.

Jones said while energy and resource companies would continue to be the most popular sector for outbound investment, a shift in focus by China’s 12th Five Year Plan could change this.

The plan focused on sustainable growth and would result in a gradual decline in the outright acquisition of resources, as Chinese companies look to acquire less tangible assets such as new technologies.

According to Jones, the first wave of Chinese investment was focused on rapid acquisition of strategic resources.

“However, a number of costly projects are yet to deliver value,” he said.

Jones said there was no doubt this was a catalyst for the country’s government to introduce a raft of new regulations designed to ensure that state-owned enterprises did not pursue international investments that were overpriced, strategically unsound or were unlikely to succeed.

Under the new rules, SOEs looking at offshore acquisitions would now have to get a third-party appraiser to independently value the target and provide the State-Owned Assets Supervision and Administration Commission with the results.

“The new regulations have elevated the importance of the deal price and profitability in Chinese acquisitions to a new high,” Jones said.

“As a result, we’ve already seen some real-life deal breakers where SOEs have backed away from major negotiations due to concerns they won’t be able to justify the deal’s value to SASAC.”

Deloitte’s report highlighted that 19 outbound energy and resources investments were completed by Chinese companies in the first half of this year totalling $5.6 billion, compared to the 26 deals worth $14.8 billion in the previous corresponding period.

“Notably, large cap [more than $500 million] deal volumes over the first half of the year fell back to come in line with long-term averages as bidders were unwilling or unable to make big-ticket acquisitions,” Deloitte said.

“Instead, energy and resource investors are increasingly showing price discipline and are not willing to secure assets at any price – the failed Minmetals bid for Equinox, where Minmetals was unwilling to increase its bid over the price offered by Barrick [Gold Corporation] being testimony to this.”

Deloitte said despite large cap transactions falling in frequency in the first half of this year, small cap acquisitions surged and were up from 37% to 61% in the overall market.

“The rising popularity of smaller scale acquisitions could be a result of these new regulations designed to encourage greater pricing discipline or it could be because of the financing structures Chinese companies are now offering,” Jones said.

Jones said those financing structures had proved to be very attractive to new mining ventures that required significant capital expenditure to fund project development, particularly in emerging markets where increasing amounts of Chinese energy and resource investments appear to be focused.

With global competition for resources continuing to rise, Chinese energy and resource companies are looking for quality assets and extending their reach to regions including the Democratic Republic of Congo, Mongolia, Yemen, Syria and Angola.

“Every mining or oil and gas operation needs adequate transportation, energy and water infrastructure in place to support the extraction and production of the resource,” Jones said.

“Without those things, the investment is probably not going to be viable and an otherwise attractive deal may become a complex catch-22 situation.

“Chinese companies keen on investing in emerging markets are addressing the problem by taking on the task of constructing the infrastructure necessary to make projects viable, but lowering their merger and acquisition bids as a partial recompense for this fiscal effort.”