China has slipped off the radar of many Asian companies looking for acquisitions, with Southeast Asia now the target market of choice, a survey of regional chief financial officers (CFO) found.
The mainland slipped to fifth place in this year's survey from first in 2013, while Southeast Asia climbed to the top spot from second last year, the Bank of America-Merrill Lynch CFO Outlook survey found.
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"China's inbound M&A story has been declining for some time," the report said. "The slowing of China's economic growth, higher labor costs and uncertainty about China's political transition have all contributed to a dwindling appetite for deal-making."
Foreign inbound M&A into China slipped to $31 billion last year, down from an average $33.6 billion over the past five years, while the number of deals slipped to 540 in 2013 from 831 in 2012, it noted.
India and South Asia took the second position, up from third last year, and emerging Southeast Asia leapfrogged to third from seventh last year, the report said.
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"Southeast Asia is where the best growth story may exist right now," says Lawrence Lau, the Shanghai-based CFO for U.S. manufacturer Owens Corning, told the survey.
But while the region is piquing interest, not all CFOs are ready to strike.
It may be too early to take the plunge, David Nicol, CFO of Philippines-based public private partnership Metro Pacific Investments, told the survey.
"Asset values are still high," he said, adding he expects many companies have taken on too much leverage and will eventually need to put assets on the market at more reasonable prices to deleverage.
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Asian CFOs are also interested in sticking closer to home, with interest in deals in North America and Europe at a low ebb. North America slipped to 13th out of 13 from fourth last year in the rankings of M&A target markets, while Western Europe fell to 11th from fifth, the survey found.
To be sure, CFOs planning acquisitions this year are in the minority; 62 percent don't have any acquisition plans, around the same as in 2013, the survey said, while only 24 percent said they plan to deploy excess cash for M&A.
"CFOs across Asia show a distinct preference for organic growth," the survey said. "'Organic expansion' remains the top priority for usage of surplus cash in every country and region surveyed," with the exception of Taiwan.
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A key reason for avoiding M&A may be concerns about rising capital costs, as many CFOs expect the tapering of the U.S. Federal Reserve's asset purchases to result in higher funding costs across the region, Bofa-ML said.
"Bank borrowing needs seem to be tempered this year by the wariness of building up too much debt," the report said, noting 31 percent of Asia's CFOs said they expect their borrowing needs to rise this year, down from 40 percent who believed that last year. "A sense that higher funding costs will kick in as the Fed taper rolls out is contributing to stated drop in borrowing needs."
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1