Outbound investments from Chinese companies are expected to pick up next year, but that's not necessarily good news for every sector hungry for China's cash.
That is, experts said most of the deal-making will likely happen in sectors aligned with the Belt and Road Initiative — China's massive plan to connect Asia, Europe, the Middle East and Africa with a vast logistics and transport network.
The experts said there were encouraging signals from the 19th Communist Party Congress that concluded last month.
Developments from the event, "clearly indicated that the Chinese government will continue to encourage overseas expansion," Harsha Basnayake, Asia Pacific managing partner for transaction advisory services at EY, told CNBC. He added that Chinese outbound deals will "be a significant play" in global mergers and acquisitions trends.
Others agreed: "We expect 2018 to be a strong year for China outbound M&A [mergers and acquisitions] as all of the ingredients appear to be in place," Colin Banfield, Citi's Asia Pacific mergers and acquisitions head, told CNBC in late October.
Those ingredients, Banfield said, included the completion of the Party Congress, the "sound macro fundamentals" of the economy, China's push to take a more central role in global affairs, financially well-resourced private sector and state-owned companies and a set of newly implemented rules and guidelines for vetting outbound deals.
What Beijing wants
In early November, Beijing issued a new set of draft guidelines aimed to make outbound M&A easier. As part of those new rules, China is streamlining a process for domestic companies investing over $300 million overseas to gain the required approval from authorities, Reuters reported.
Yet at the same time, Beijing will also increase oversight on the investment practices of overseas subsidiaries of Chinese companies. Previously, businesses could set up foreign companies and use funds through them to do deals, thereby skipping many of China's capital outflow restrictions.
Beijing's recent draft followed guidelines it issued in August dictating what kind of overseas investments would be banned, restricted or encouraged. The move formalized Beijing's attempts beginning last November to control what it called "irrational" foreign investments.
But the Chinese government is doing more than just limiting some kinds of deals, it's also explicitly encouraging other kinds: Experts agreed that the government's strong support for the Belt and Road Initiative, which was written into the Communist Party constitution last month, will mean some redirection to related activities in outbound M&A.
The Belt and Road Initiative involves 65 countries, which together account for one-third of global GDP and 60 percent of the world's population, according to Oxford Economics. As such, experts say certain sectors, and countries, are expected to benefit from the expansion efforts of Chinese companies.
Lian Lian, JPMorgan's managing director and co-head of North Asia M&A, told CNBC investments that can "create need for China's industrial capacity [and] manufacturing capabilities" will likely benefit. Those sectors include infrastructure, natural resources, agriculture, trade, culture and logistics. "These are clearly what they outlined as favored industries," she said, referring to the August guidelines.
Overseas deals in those areas are likely to get faster approvals from the government.
Lian added that a few other sectors will also receive government support, even if they were not mentioned in the August guidelines. Those sectors include food safety, health care and investments that can create more employment in China. "These, although they were not specifically listed in the encouraged list, we believe also will bring benefits to China's economy and should receive support," she said.
Overall, Lian said she is optimistic about deal activities next year, but mega deals will remain more challenging than before Beijing's intervention.
Citi's Banfield added that Beijing would also favor investments that enhance China's manufacturing capabilities in equipment and technology, and provide access to exploration and development of offshore resources.
Meanwhile, although the U.S. and the European Union have always been favored destinations for Chinese overseas M&A, there was interest emerging in countries falling under the Belt and Road Initiative, according to Alicia Garcia-Herrero and Jianwei Xu, economists at French investment bank Natixis. Association of Southeast Asian nations, particularly Singapore, as well as South Korea and South Asia have become focal points since the announcement of the initiative, the economists added.
Garcia-Herrero told CNBC that it would be "really impossible" for Chinese overseas spending to exclusively fit into a Belt and Road framework, but investments in heavy assets like industrials and infrastructure would be "mainly Belt and Road-related." On the other hand, she said, more asset-light targets such as health care, retail, services or technology will "continue to be West-driven."
What Beijing doesn't want
In the last few years, Chinese companies went on massive shopping sprees, snapping up deals varying from luxury resorts to soccer clubs. Many of those deals, experts said, were considered trophy assets and did not align with China's economic goals. Outbound deals grew steadily since 2009 and hit about $200 billion in 2016, a year that included a massive $43 billion takeover bid for Swiss agribusiness Syngenta that was announced by China National Chemical Corp.
Authorities grew worried about economic and financial risks tied to some of those deals. Cash was also flying offshore, which added more pressure to an already weakening yuan and it was unclear how much debt firms were taking on to finance those acquisitions.
The spike in outbound M&A activity was a result of China's increasingly massive financial resources and appetite but also decreasing rate of return on investment domestically, according to Garcia-Herrero and Xu. They added in a note that other reasons for the uptick in deal-making included the "lack of geographical diversification of Chinese corporates' assets and the very concentrated risk on a slower growing China."
But after Beijing clamped down on capital outflows, dealmaking took a hit. Data showed that the total number of deals announced in the first nine months of 2017 fell notably when compared to the same period in the prior year.
There was a 12 percent decline on-year on the number of deals announced in the January through September period, according to Dealogic. Meanwhile, Mergermarket data showed the total value of all deals over $5 million, announced in the same period, fell more than 50 percent on-year.
— Reporting from Sophia Yan and CNBC's Tan Huileng was used in this article.