Acquisitions of China assets by US companies have plummeted to their lowest level since 2002, according to recent data from Dealogic reported by the Wall Street Journal (“WSJ”) MoneyBeat blog. The news that only 25 deals to buy Chinese assets were made by US companies in the first half of 2014 stands in stark contrast to what is seen as a booming overall global M&A market and one in which US companies are on the move. While US companies’ mergers and acquisitions volume is up 47% globally year-to-date (see WSJ MarketWatch article), US acquisitions in China have fallen over 70%, from nearly $2.3 billion in the first half of 2013 to a mere $611 million over the same period in 2014.

Does this mean that China is becoming less attractive to foreign investment despite the new leadership’s commitment to economic reform?

With the announcement of its new economic reform agenda last year at the Communist Party’s Third Plenum and subsequent developments, the administration of President Xi Jinping and Premier Li Keqiang, just one year into its term, has raised expectations for comprehensive economic reforms  that are intended to give the market a “decisive role” in the Chinese economy. The ambitious agenda includes policies to liberalize China’s financial markets, reform land and labor markets, restructure state-owned companies (SOEs), and cut red tape. (See further discussion of the proposed reforms by Covington & Burling’s Timothy Stratford here).

The government’s reform agenda is urgently needed, and its general contours have been welcomed by economists and the business community. The current leadership, aware of the shortcomings of the current investment-led economic growth model (perhaps most clearly demonstrated when the 2009 monetary and fiscal stimulus measures created an investment boom that was accompanied by a sharp rise in debt, particularly among local governments), is seeking to bite the bullet and execute a long-anticipated transition to a more consumption-led growth model. The new policy guidelines, in this regard, seek to tackle the heavy involvement of the state in the Chinese economy — no easy feat.

While the reforms make good economic sense in theory, the latest M&A figures along with a range of other quantitative and qualitative indicators suggest that multinational companies are beginning to look beyond China in the short-term while the country gets its restructuring act together. This reaction is potentially being further propelled by the political and regulatory tightening underway in China, which some interpret as setting the stage for the difficult economic reforms to come. This tightening is evidenced by a recent spate of high-profile anti-corruption and anti-trust enforcement actions.

The spike in anti-monopoly law enforcement actions against foreign companies has been of particular concern for the foreign business community in China. Government agencies enforcing China’s anti-monopoly law and other regulations have wide discretion over their interpretation and application, and are seen by some as using the law to support favored local companies and target foreign competitors. The lack of transparency and reliable channels to defend a company’s interests in such an enforcement action exacerbates foreign companies’ nervousness in the current climate. A statement from the European Chamber of Commerce on August 13, and a similar statement issued by AmCham today, both highlight these concerns.

As these and related concerns grow, companies appear to be increasingly cautious with respect to their engagements in the Chinese market. And those companies that are deepening or maintaining significant investments in China are becoming more sophisticated, paying renewed attention to the important role that public policy and government relations play in their China strategies.