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Special> China International Fair For Investment & Trade> Beijing Review Exclusive> Investment
UPDATED: August 31, 2009 NO. 35 SEPTEMBER 3, 2009
Eyeing Abroad
China regains its appetite for mergers and acquisitions overseas

GOING GLOBAL: Rio Tinto appears to be seeking a resumption of talks with Chinalco after scrapping the $19.5-billion investment deal proposed by the Chinese company in June, according to its half-year financial report (MA JIANGUO) 

With two outbound deals in less than one week, China's buying spree is coming under the global spotlight once again.

On August 18, China Petrochemical Corp., the country's biggest oil refiner, agreed to pay 8.3 billion Canadian dollars ($7.2 billion) for the takeover of Addax Petroleum Corp., an oil producer listed both in Toronto and London, with interests in Africa and Iraq. This marks the largest outbound investment ever made by a Chinese company.

In another highly publicized move, the Yanzhou Coal Mining Co. Ltd., based in Shandong Province, launched a bid on August 13 for the Australian coal mining company Felix Resources Ltd. in a $2.9-billion deal.

There appears to be increased deal-making prowess and awareness of the pitfalls ahead on the part of the Chinese business community that has arisen from increased financial savvy and hard lessons learned from past pains.

Indeed, the headline failure of Chinalco's $19.5-billion investment proposal for Australian miner Rio Tinto is believed to be the trigger for this trend of overall caution.

Even the China Investment Corp. has proceeded with outgoing forays in a more considered, low-key fashion. The Sovereign Wealth Fund, for instance, recently snapped up a 17.2-percent stake in the crisis-ridden Canadian miner Teck Resources Ltd. that owns a number of gold, zinc and copper mines throughout North America.

Analysts say this just may signify the beginning of a shift by the investment powerhouses to diversify through securing long-term resource supplies, as opposed to piling foreign exchange reserves into low-yield U.S. Treasury bonds.

These outbound transactions grew to total $10.8 billion in the second quarter, up from $3.9 billion in the first quarter, with the number of deals increasing by 17 percent, according to a report released by the renowned accounting firm PricewaterhouseCoopers.

The report says the expansion-minded Chinese companies are pursuing their opportunities before the recovering prices put their target assets out of reach.

The temptations are too great to be ignored. The financial meltdown in the developed world, coupled with a stronger yuan, has left deep-pocketed Chinese companies in a good position to pick up cheap margins. More importantly, many beleaguered companies around the world are expecting Chinese buyers to come to their rescue.

Seeing it as an effective vehicle with which to build a global presence, the Ministry of Commerce earlier this year loosened controls on overseas investments and streamlined application approval procedures.

Chinese investors must have a clear strategy on how to build a foreign foothold, instead of participating in risky speculations to take advantage of market lows, said He Fan, a researcher with the Chinese Academy of Social Sciences.

Xing Houyuan, Director of the Research Center for Overseas Investments under the Ministry of Commerce, agreed. "It is unreasonable to let the speculative buying rush overwhelm long-term priorities," he said in a recent report.

Controversies surrounding the Sichuan Tengzhong Heavy Industrial Machinery Co. Ltd. demonstrated recognition of the importance of realistic expansions. By pursuing the road-hogging Hummer brand of General Motors (GM), the Chinese private equipment maker hopes to learn about SUV (Sport Utility Vehicle) technologies. But given its inexperience with auto-making, analysts have been asking how it can turn around a brand that even GM failed to rescue. Some even questioned whether the little-known company was biting off more than it could chew.

Analysts believe it is safer to obtain a minority stake in the target or simply garner core technologies than to acquire the whole company, which would otherwise require more complex cross-border management expertise. The souring businesses of the appliance maker TCL and PC maker Lenovo in North America show how difficult it can be to become a global player.

Beyond that, if there is a common risk as to what might scupper foreign deals before they are completed, it is tough regulatory hurdles. In the case of Chinalco, it is the review delay by Australian regulators that allowed time for Rio Tinto to seek alternative partners.

During the four months waiting for regulatory approval, for instance, Rio's share prices and the global commodity prices staged a prolonged rally, taking the shine off Chinalco's investment proposal.

China Minmetals Corp., on the other hand, is far luckier. The metal trader has successfully clinched a $1.39-billion deal to buy a number of prime assets of the Australian miner Oz Minerals Ltd.

"To smooth the way for going out, you have to keep it in a low profile, and try to avert hostile public opinions," said Liu Yinan, Vice Chairman of the China Chamber of Commerce of Metals, Minerals and Chemical Importers and Exporters.

It is also better to start with smaller deals that are in a better position to get a green light, he added.

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