Since 2003, China's foreign direct investment has been growing significantly, doubling almost every year. Chinese enterprises have flocked to mergers and acquisitions in their direct overseas investments.

In recent years, 40 percent of China's foreign direct investments were for overseas mergers and acquisitions (M&As), especially in overseas oil and gas due to the nation's growing demand for energy.

According to statistics from the United Nations Conference on Trade and Development, China's M&As of oil and gas companies accounted for 23.7 and 46.4 percent, respectively, of the nation's portfolio of overseas M&As in 2008 and 2009.

Setting prices, however, has been a major constraint for Chinese energy companies. Sinopec, for instance, announced its plan to acquire Addax Petroleum in August 2009. However, Addax's share price soared quickly from C$19.6 (14.4 euros) to C$52.7 (38.8 euros) per share in the next eight months. Sinopec eventually completed the deal at the price of C$52.8 per share. It cost Sinopec a big fortune to acquire Addax.

A number of changes have taken place in the international market for M&As of energy companies and these changes have created a complex environment for Chinese enterprises to carry out transnational acquisitions.

Some Western countries have designed new obstacles to prevent local energy enterprises from being acquired by foreign companies.

Changes in international energy prices have become more complicated. Before the eruption of the global financial crisis, oil prices soared rapidly with high volatility in oil prices.

To ensure its domestic energy security, China is paying more attention and injecting more financial resources in overseas M&As of oil and gas companies.

But how should China select these companies? It should choose targets with higher energy reserves but with lower production capacities because production profits directly affect pricing. Production can be significantly improved if China selects companies that are not producing as much in capacity but have the potential for high production.

Chinese enterprises should acquire foreign oil companies when the oil prices are low because oil prices can greatly affect the prices of energy companies. Chinese enterprises should avoid rash investments on foreign energy companies when oil prices are high.

M&As should be conducted when international liquidity is tight. In fact, liquidity is not a clear indicator of when M&As should be conducted. Investors can use asset prices to judge liquidity. When asset prices, such as a stock index, are low, it is very likely a good time to make overseas energy purchases.

Chinese energy enterprises should choose countries with a more open attitude toward international M&As. They need to select countries with a sound investment environment and minimal barriers. Currently, China has many investments in the Middle East and Africa, but their locations have placed financial strains on Chinese companies which have acquired energy companies there.

China should also focus on small- and medium-sized acquisitions. Generally, China's energy companies have reached a certain limit in size. In this case, even if the choices are relatively small- or medium-sized foreign targets, they could grow into large-scale enterprises in the future.

China should seize upon M&As during this global economic downturn. The demand for energy is expected to decline and energy prices will fall within this time and that will create bargains for international M&As.

The author is a researcher with the Chinese Academy of Social Sciences.