Weak M&A activity forecast until policy outlook clears

The anti-monopoly campaigns, which officials with the Ministry of Commerce deny are intended to target foreign companies, have involved some of the toughest penalties yet on foreign brands.

According to PwC, investment from elsewhere in Asia including Japan exceeded United States and European-sourced transactions in the first half, but the biggest deals came from European buyers including carmakers Volvo Car Corp and Daimler Motor Co.

Outbound deals from the Chinese mainland also declined in the first half, with only 78 transactions, compared with 95 in the previous six months, according to the report.

"Many companies focused on addressing challenges in the difficult domestic market, with local debt financing for M&A becoming more difficult to obtain," Li said.

One example was the construction machinery sector, where there have been some major outbound takeovers, such as Sany Heavy Industry Co Ltd buying German giant Putzmeister Holding GmbH in early 2012. Such deals have been rare this year, because of the absence of government support.

PwC forecast an increase in domestic debt restructuring, as borrowers with non-performing loans are unable to refinance or roll over their loans.

Trends such as these, which will be encouraged by policymakers as a means of squeezing excess capacity out of the economy, may be more visible into 2014, the report said.

"We expect that there will be more consolidation in industry sectors in China with a resulting upturn in domestic strategic M&A," said Li.

Private equity funds, the most sensitive dealmakers to policy trends, saw new fundraising decline by 46 percent in the first half of 2013, compared with the second half of 2012.

"While cautious on policy direction and the softening of the China economy in general, PEs are also dealing with the transition from growth capital to [the buy-out phase], with fewer buy-out opportunities, and minority deals not favored because of concerns over ability to exit," said Roger Liu, PwC's China/HK deal PE leader.

"With A-share markets effectively closed, and overseas bourses unreceptive, IPO exits have slowed to a trickle," Liu said.