China is in the midst of something just short of a global buying spree of crude reserves, metal and mining companies, tech concerns, and manufacturing operations. It would be easy to say that the effort will lose its momentum when the economy of the world’s most populous nation hits a wall as the Japanese did in the 1990s. China’s central government and the nation’s huge consumer base may allow the country to avoid that fate, even if its massive export base is temporarily damaged by the global recession. Japanese interests temporarily had the capital to make purchases of assets all over the world in the 1980s, but the island country never had the capacity to match the buying power of China’s middle class or the astonishing amount of capital that China has built up in its treasury after years of budget surpluses. China may even be able to pass through a recession without entering a prolonged downturn and the stagflation that crippled Japan for the better part of a decade. China has the access to raw materials within its borders and inexpensive rural labor which Japan never had. It also has a central government which largely controls the use of massive amounts of the country’s capital.
China’s ability to continue its acquisition of foreign assets may be sustainable and it comes at a time when the global economy is weak enough and credit availability is sparse enough that government-backed businesses in China will be the buyers or financiers of last resort of assets which many nations consider strategic to their security and ongoing industrial and technology independence.
China has made a number of attempts to buy or affiliate itself with large companies throughout the world as it moves to control assets that it either does not have in abundance or does not have at all. One of its recent failed attempts was an effort by Huawei Technologies and Bain Capital to buy US network-equipment operation 3Com, which was stopped when some members of Congress and the Committee on Foreign Investment in the United States voiced opposition to the transaction. 3Com has certain intellectual property that some American interests did not want to see fall into Chinese hands. More recently, a transaction that would have given Chinese metals company, Chinalco, an interest in mining giant Rio Tinto (RTP) and a steady supply of iron for a $19.5 billion investment fell apart. Some experts believe that concern about the deal among officials in the Australian government was to blame, at least in part.
China has had more success in the oil industry. It is in the process of loaning Brazilian oil giant Petrobas $10 billion to help finance its deep water drilling. Part of the complex transaction would insure China at least 100,000 barrels a day of crude at market prices. In another transaction, Sinopec (SNP), one of the mainland’s largest oil companies, will buy Addax Petroleum of Canada for $7.24 billion. Addax is involved in drilling fields in Iraq. Sinopec probably could not have made the offer without access to low-cost capital from the Chinese government.
China’s push for extremely large acquisitions has moved beyond commodities. Beijing Automotive apparently made an offer recently to invest in Opel, GM’s European operation. The business will probably be sold to Canadian auto parts firm Magna, but the fact that a Chinese car company would be in the bidding mix at all is a sign that as assets in the troubled global car industry come onto the market, mainland firms are likely to show up with their checkbooks. Sales of cars in China may surpass those in the US for the first time ever in 2009. China’s car companies have learned a great deal from their partners like VW and GM and can use those lessons in product design and manufacturing to expand abroad through exports and acquisitions. An adept student will begin to school their teachers in the global auto industry.
All of these transactions are part of an emerging problem which is the extent to which Western governments are willing to block Chinese investments in assets and companies that operate inside their borders. Global industries like the car business may face a need for capital that could last for several years. Developing oil fields in countries like Iraq which has limited access to cash will require tens of billions of dollars. That money, for oil rich and capital poor nations, will either have to come from the largest oil companies like Exxon (XOM) and BP (BP) or it will have to come from sovereign capital pools, the largest of which are Chinese.
The nations with the greatest resources have begun to fall into two categories. The first is developing nations like Brazil and Iraq which are enthusiastic about taking Chinese capital. It is not only plentiful but comes with low interest rates if the Chinese get a quid pro quo in terms of access to critical commodities. Almost all of these deals are based on just that—China needs crude and metals to keep its economy expanding at its remarkably rapid rate.
The second group of nations includes the US, Canada, the EU nations and Australia. These countries have both raw materials and developed assets. The most important of these developed assets are technology and manufacturing companies which supply large bases of consumer and enterprise spending. The capital that has already gone into these firms is usually based on engineering and product development prowess.
The economy and nearly collapsed credit markets may not right themselves entirely for several years. The largest banks based in the West are not likely to recover sufficiently near-term to offer the substantial liquidity that will be required to underwrite a full-scale recovery. The rebound of the economy can be stunted by the West’s credit deficiency but outside capital, much of it likely to be from China, can be used to repair balance sheets and get shareholders money as companies with depressed values are sold for their long-term potential.
China can grow its way toward becoming the world’s largest economy and it can also buy its way there. It will need to acquire tech companies, auto manufacturing facilities, raw materials, pharma corporations, and large financial services companies for its acquisition programs to yield a complete portfolio of businesses and assets that can serve both the Chinese markets and those abroad.
Developed countries have no firm and transparent set of rules covering which assets the Chinese are free to buy and which are “strategic” and are not for sale. But, these nations may also not have the capital to nurture the base of “strategic” sectors leaving them to grow less quickly than they might otherwise. The US cannot create a multi-billion fund to provide liquidity to biotech and software companies because the government’s access to capital is already near its limit.
The Congress and Administration will be left to decide where and when China can invest in US companies and industries and will let potential buyers know of those decisions ex cathedra. The American government has the power to block any investment from China that is not in the “national interest” of America. That is no policy at all and will keep the Chinese confused and uncertain, which will almost certainly damage the relationships between the two nations.
Douglas A. McIntyre
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