A record US$99 billion worth of M&A deals was sealed in China in 2006, the rating agency said. The country's growing M&A market boosted the value of transactions in Asia Pacific, excluding Japan, to a record high of US$385.4 billion, a 50 percent jump over the previous year.

Most of the M&A deals in China in the past year targeted banks, metals, oil and gas, medical and technology companies. Deals among domestic companies contributed to more than half of the transactions last year.

Foreign funds flooded into China's M&A market last year as the government opened more sectors to overseas investments. Even in the banking sector, where overseas players can only hold a minority stake, several acquisitions were often heard last year. Overseas investors can hold a combined 25 percent in a domestic lender while a single investor can only own 20 percent.

For instance, Banco Bilbao Vizcaya Argentaria SA, the second-biggest financial group in Spain, agreed to pay 501 million euros (US$650 million) for a five percent stake in China Citic Bank.

"Foreign investors are likely to be drawn to a wide range of sectors in 2007, such as in the retail, service, and consumer-goods markets, where competition is intense," said the report. "Some of these sectors are viewed as less strategic to China and are therefore less protected, with foreign investors able to buy a large or controlling shareholding."

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