The value of foreign deals made by mainland Chinese companies abroad is sharply up on last year’s figures: At US$63.0 billion in the first half of 2018, it was 45.5% higher than for H1 2017.

But the pace of deals has been less frenetic. A total of 129 transactions announced in H1 2018 shows a drop of 31% compared to H1 2017. These figures reflect fewer smaller and mid-sized deals being announced, with the overall value boosted by a limited number of large transactions.

In particular, the picture is distorted by the US$27.4 billion acquisition by the China Three Gorges Dam Corp. of a 76.7% stake in Energias de Portugal SA. Without this, the total value of acquisitions would have been only US$35.6 billion—considerably less than the H1 2017 tally.

Moreover, even should the value of acquisitions announced in H2 2018 achieve the same height as H1, the year will still finish far behind 2016’s peak of US$119.1 billion.

The pace of activity has slowed partly because of the Chinese government’s efforts to curb what it has called irrational dealmaking, in part to reduce the flight of capital outside the country.

Particularly important are the Overseas Direct Investment (ODI) guidelines published in August 2017, which classify outbound investment activities as Encouraged, Restricted or Prohibited. Restricted investments include property, private equity and deals that contravene environmental standards.

Encouraged investments are those that further China’s One Belt, One Road (OBOR) initiative (an ambitious plan to build roads, rails, ports, pipelines and other infrastructure joining China to Central Asia, Europe and Africa), enhance China’s technical capabilities, or relate to research and development or natural resources.

Even more crucial to the slowdown in China’s foreign M&A since 2016 is a rising protectionist trend among Western governments regarding inbound acquisitions from Chinese bidders.

In January, the Committee on Foreign Investment in the US (CFIUS) rejected the acquisition by China’s Ant Financial of Moneygram, the US money transfer company, due to national security concerns. Stricter legislation to reinforce CFIUS’s powers is making its way through the US Congress. In this new environment, Chinese M&A into the US has been stifled, with just 22 deals worth US$1.8 billion announced in the first half of the year.

Some European countries are considering increased scrutiny of Chinese M&A. But while certain Chinese investments into Europe have been scrutinized, disallowing Chinese investments will remain the exception, and the scrutiny will focus on certain key infrastructure, technology and defense industries.

Chinese companies are successfully integrating acquired businesses in a way that unlocks value as they gain more experience at M&A. Moreover, Chinese companies are polishing their reputation for corporate governance and investor relations, boosting their appeal to foreign shareholders and regulators.

The encouraging effects of China’s strategy appear in the 2018 All-Asia Executive Team survey published by Institutional Investor. The survey asked more than 4,000 people at financial institutions on both the buy and sell sides to nominate their favorite executives and companies from an investor relations point of view. For the second year in a row, the survey showed corporate China extending its lead over other countries, now dominating in nine out of 18 sectors, including the internet.

Furthermore, corporate China is striving to improve environmental standards. For example, many Chinese companies are issuing green bonds—securities whose proceeds are used by the issuer to fund projects with strong environmental credentials. In 2017, Three Gorges issued a €615 million green bond to fund wind farms in Germany and Portugal.