Despite the global financial crisis, Chinese state-owned companies
continue buying assets overseas, especially in the energy and resource
industries. The trend is expected to continue into the next decade.
From
Australia to Iraq, Chinese state companies are gobbling up fuel and
commodities around the world. About 90 percent of Chinese overseas
investments in the first half of the year went to the energy and basic
materials sector. Last year, China mergers and acquisitions deals
totaled nearly $24 billion.
Jing Ulrich is chairwoman of China equities and commodities at the investment bank JP Morgan.
"I
think the Chinese government strategy is to gradually acquire more
resource-based assets because China is a resource poor country but it
is cash rich," she said. "To fuel China's future development, you need
a lot of copper, a lot of iron ore, a lot of other metals, including
gold. So I do believe that China is on a path to overseas acquisitions."
China
is expected to increase its acquisitions in the mining and oil
industries by 50 percent this year to take advantage of cheaper prices
because of the financial crisis.
China has $2 trillion worth of
foreign currency reserves. Andrew Lam, a partner at Grant Thornton, a
financial advisory company in Hong Kong, says this year's massive
economic stimulus spending program has added more ammunition to
ambitious Chinese companies.
"Through the big banks, the
government is pumping a lot of money into the economy. And this money
is actually working its way into increased spending," he said.
China
is the world's largest buyer of iron ore and the biggest consumer of
steel. To encourage overseas investment, the government has streamlined
the approval process, encouraged financing and allowed companies to
retain foreign currency income.
The biggest deal so far this
year is Sinopec's $7 billion acquisition in August of Addax Petroleum,
which operates an oil field in Iraq's Kurdistan region.
Chinese
state-owned companies have not been shy in courting the biggest
companies in the world. But these attempts have revealed their
limitations despite their deep pockets.
Chinalco's $19.5 billion
offer for a stake in one of the world's largest miners, Rio Tinto, was
rejected. And many in Australia, Rio Tinto's home country, say that led
to the arrests of four Rio Tinto executives in Shanghai for alleged
bribery and commercial espionage.
The Rio Tinto espionage
case highlights the political complications arising from dealings with
state-owned companies. David Li, economics professor at Tsinghua
University in Beijing, says Chinese companies are entering new terrain.
"China's
demand for resources is through the purchases of our state-owned
enterprises because many of the resource-using enterprises are
state-owned enterprises. And these state-owned enterprises are in
negotiations with companies with strong government support. So this is
a new challenge," he said.
China has also been aggressive in
pushing for changes in global commodity pricing. Earlier this year,
China pressed the world's biggest iron ore suppliers to cut prices.
Li says China's hunger for resources has massive implications for the rest of the world, beyond mere business deals.
"China's
demand for these resources potentially will also help resource rich
countries like Mongolia and Nigeria, to upgrade their economic
structure. We are able to reach a win-win solution not only for China,
but also for resource rich countries and the rest of the world," he
said.
Mongolia's mining minister, F. Zorgit, says such investments have the potential to radically change his country's future.
"To
give you an example, one mining project can quadruple the country's GDP
(gross domestic product). The country's budget revenue can depend on a
single company so much that the politics and economic life can be
changed by that company," said Zorgit.
In August, Mongolia's
parliament passed a law opening up the mining sector to foreigners. The
country is rich in copper, gold, uranium and coal - a fuel China needs.
Market
experts say Chinese strategic acquisitions will continue over the next
five to 10 years. Chinalco's chairman recently said Chinese companies
face huge challenges in these overseas forays, but they are learning
lessons every time.
