However, CFIUS rarely blocks agreements. It has reviewed more than 1,500 transactions since 1988 but blocked only one - the proposed 1990 acquisition of a US aerospace company by China National Aero-Technology Import & Export Corporation.

National security should be clearly defined to build such a system, says Wang Zhile, a researcher at the Chinese Academy of International Trade and Economic Co-operation.

"National security is not a volatile feeling that can be frequently mentioned," says Wang, a researcher on multinational operations in China.

Li Deshui claimed that by 2005, multinationals controlled more than 80 per cent of China's large-scale supermarkets, with foreign companies also enjoying virtual monopolies in other categories such as skincare.

However, foreign retailers actually account for less than 10 per cent of the country's retail sales.

It is also frequently cited as proof of a foreign monopoly threat that most of the 2,000 enterprises in the equipment-making industry with more than 100 billion yuan (US$12 billion) in annual sales are foreign-funded.

In reality, it means that the market is fully competitive, and is not a threat to national economic security, says Wang.

"Simply making it harder for foreign investors does not solve the problem; it only makes matters worse."

Compared with other regions around the world, the M&A wave in China has not yet reached its peak and has been picking up only in recent years with the easing of restrictions.

The total volume of Asia-Pacific M&As last year hit a record US$474.3 billion, up 46 per cent from US$324.5 billion in 2004. China leads the race as the most targeted country outside Japan, recording a total US$66 billion in announced deals in 2005, compared to US$58.9 billion in 2004, according to market data firm Dealogic.

At the same time, MOFCOM data shows that foreign greenfield investment last year fell 0.5 per cent to US$60.33 billion.

Many foreign investors now prefer acquisitions of Chinese enterprises rather than greenfield investments, because it saves time for those eager to gain a foothold in the country, Wang says.

Investment bankers warn that the current negative sentiment could reduce overseas companies and buyout groups' appetite for takeovers. Carlyle Group's landmark 3 billion yuan (US$370 million) takeover of Xugong Group, China's largest construction equipment maker, has been stalled.

People familiar with the situation say MOFCOM is refusing to approve the deal - the country's largest private equity buyout - unless Carlyle promises not to sell its majority stake to a foreign construction-equipment group in the future.

It remains to be seen whether the tougher conditions being imposed on foreign investors will result in longer-term restrictions on foreign takeovers of Chinese companies and the creation of an anti-trust regime that is aimed at foreigners, according to an analysis by PricewaterhouseCoopers.

Carlyle's problems are matched by similar delays for Caterpillar, the world's largest construction-equipment company, in its efforts to buy into Xiamen Engineering Machinery. The company has already purchased Shandong Engineering Machinery Corp.

James Owens, chairman and chief executive officer of Caterpillar, says he is amused that people think Caterpillar is seeking a monopoly.

"Our market share in China is less than 5 per cent, lower than any other country in Southeast Asia."

Owens says he expects the company's sales to more than double in the next five years as China continues to build expressways and subways.

But the expectation is based on its current expansion plan in China, which hinges on a mix of joint ventures, wholly-owned enterprises and acquisitions, a strategy under threat in the present climate.

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