COMMENT

The world's third-largest economy seems to suddenly be making M&A headlines, particularly in the resource sector but, some analysts think it is a natural progression and the latest spate of deals is just the tip of the iceberg.

Author: Geoff Candy
Posted: Tuesday , 18 Aug 2009

Groningen -

In 2001 China invested around $700m in other countries. By 2006, that figure had risen substantially to just over $20bn but, it was in 2008, when the country and, importantly, its companies, invested around $56bn that suddenly it began to make headlines.

Since then the world has changed dramatically. As the global economy shakes its head and attempts to stand after the ten-round beating it received at the hands of Sub-prime and its big finance cut-men, Chinese companies suddenly seem to be everywhere, and they are spending money.

But, while this "new" development caught many people off guard, for those heavily involved in the Asian powerhouse, it is a logical progression. After all, China produced about 30,000 MBA graduates last year; not a bad jump considering it produced none in 1998.

Kobus van der Wath, Group MD of THE BEIJING AXIS, a cross-border China business bridge, told Mineweb, "Five years ago, very few Chinese companies were doing significant international transactions. Today, not only are the transactions significant, but they are with well-known brands and that is probably what is catching people unaware. But, it is not something unexpected. China has been talking for some time about expanding its reach both in terms of exposure and geographies."

One just has to look at the big deals in mining underway at the moment to notice that many of them involve China in one way or another.

In just the last week or so there have been announcements of an unsolicited bid for Canadian explorer Canadian Royalties by Jilin Jien Nickel Industry company; a $3bn offer by Yanzhou Coal for Felix resources; a possible deal between China National Petroleum Corporation and YPF, the Argentine unit of Spanish-based energy giant Repsol and finally the deal announced to help finance the expansion of Australian iron-ore upstart Fortescue.

These potential tie-ups follow on from many similar deals over the past year and the reasons for it are manifold. As a country, China's massive population, while growing slowly is coming off a large base and, it is increasingly becoming more urbanized.

As a result the population has more disposable income and is buying more cars and other consumable items than it once was. Add to this a massive capital expenditure programme on the part of the government, planned to help the country stave off recession as well as accommodate its rapidly urbanizing economy and you begin to realize just how much in the way of raw materials China is expecting to need in the future.

This is why, according to van der Wath, the main focus by the government and its companies is specifically in areas that will help it achieve this growth, such as energy and resources.

The country is looking to invest in assets that will be able to sustain it going forward, as opposed to having to continually negotiate as mere importers. Although that said, the country is still the third largest importer of goods in the world.

And as a result of the economic crisis, China, like many other countries has eased its monetary policy in an effort to ensure the country didn't fall into recession. But it does mean that lending money has become slightly easier.

Van der Wath adds, however, "It is also about building national champions that compete internationally. China is once again becoming a complete part of the global economy and, as such it is involving itself in all aspects of this."

It is for this reason too that van der Wath downplays the notion that China is about to enter a hostile phase where it begins to attempt ever larger numbers of hostile bids for companies or assets that it considers useful.

"It is a logical progression, China is becoming a part of the global economic system so it is only natural that it engages, on occasion, in practices such as a hostile takeover scenario, that are perfectly acceptable by modern business standards. Why should China behave or be treated any differently?"

In answer to this question, many analysts point to the fact that, unlike the world's other superpower, the US, China has around $2trillion in foreign reserves, mainly in US cash and bonds which it is looking to diversify out of somewhat - especially as the dollar hasn't been that stable of late

But, this too van der Wath sees as a secondary motive for the significant growth in Chinese investment into other countries. While he does not deny that this is indeed a factor, he says it is definitely less important than the motives outlined above.

"China is the world's third largest economy and it is likely to overtake Japan within the next year for the number two spot. As such, over time they also ought to top the ranks in outward FDI. There is something out of kilter if it is not a big player when it comes to outward foreign direct investment."