(Yicai) Dec. 5 -- The most significant challenge for Chinese firms expanding foreign direct investment is geopolitics, according to Raymond Yu, head of investment banking at Barclays China.

The backdrop of the economic downturn means that Chinese companies need to pay particular attention to their leverage ratios and avoid aggressive investment and financing arrangements, the executive from the London-headquartered bank told Yicai recently.

Since the US Federal Reserve's interest rate hikes in 2022, global financing costs have surged and geopolitical tensions have become increasingly complex, with various regions tightening their regulations on external investments. Cross-border mergers and acquisitions around the world fell 46 percent year-over-year to USD380 billion last year, the lowest since 2014, according to statistics from KPMG.

Meanwhile, Chinese firms are intensifying their foreign investments. From January to October, Chinese companies increased their non-financial foreign direct investments to USD115.8 billion, up 11 percent from a year ago, according to data from the commerce ministry.

Over the past decade, Chinese companies have become more rational and mature in their investment approaches, according to Yu. In the past four to five years, Chinese firms' M&A strategies have shifted from a frenzied approach to cautious and strategic maneuvers, targeting market expansion and new technologies.

The top investment destinations have also changed, with Chinese enterprises moving away from a focus on the United States to emerging markets like Indonesia, as well as Europe, Latin America, and the Middle East, Yu noted.

This shift is primarily related to geopolitical considerations, the banking expert explained. Selecting the right destination is crucial for obtaining approvals, particularly regarding foreign investor and anti-trust regulations in the target country, and ensuring conditions are suitable for long-term development. Chinese firms preparing to expand internationally must carefully evaluate these aspects, Yu concluded.

Editors: Liao Shumin, Emmi Laine