China ODI Update

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It has taken a long time, and there have been a few growing pains along the way (including CNOOC/Unocal and China Mobile/Millicom), but there can be little doubt that China has truly arrived on the overseas direct investment (ODI) stage.

2007 saw the launch of the China Investment Corp., the sovereign wealth fund, which is understood to have earmarked some US$70 billion for overseas investments, and which has already made headlines with deals such as:

    • US$5 billion (which could amount to a 9.9 percent stake) investment in US sub-prime victim Morgan Stanley

    • US$3 billion investment in US private equity group Blackstone.

Interestingly, in both deals, it has been reported that China’s investment will be “passive”. But it (and Chinese government vehicles generally) is not the only ODI player, as a scan of some of the recent international investment deals makes clear:

    • China Development Bank: Investment in Barclays Bank in the UK. (CDB has just turned down the chance to invest US$2 billion in Citigroup).

    • Ping An Insurance: US$2.6 billion investment for 4.18 percent in Fortis, the Eurpoean financial services firm.

    • ICBC: Purchase of 20 percent of South Africa’s Standard Bank.

    • CITIC Securities: US$1 billion investment as part of a strategic link with Bear Stearns in the US.

    • Huawei Technologies: Part of the proposed buyout of 3Com, the US telecoms equipment maker (under review in the US)

But China does not feel it is having everything its own way and, while it has finessed its approach to international deals since the failed Unocal bid, there are still sensitivities and barriers that need to be watched. The FT reported in December on Sino-US talks to address the issue of protectionism:

    “The US and China have agreed to accelerate talks on a bilateral investment treaty amid concern in Beijing that the Chinese are being blocked from buying into US companies and assets.

    …A communiqué [after the close of the twice-yearly top-level dialogue between the two countries] included, at Beijing’s request, a commitment from the US that Chinese banks would be treated like other foreign lenders if they wished “to acquire stakes” in US banks.

    China is watching closely how Washington handles Huawei Technology’s role in a takeover – led by Bain Capital – of 3Com, a US telecoms equipment maker which supplies security equipment to the US government.”

While deal flow is picking up, there is also likely to be strong growth in China’s investment into international equity markets, as MarketWatch has reported:

    “The money flowing from China into global equity markets could tally as much as $246 billion [in 2008], with markets in Hong Kong and South Korea expected to benefit the most, according to HSBC Global Research.

    “The great wall of Chinese money could be about to arrive,” HSBC strategist Garry Evans wrote in a research report…HSBC says it reached the $246 billion figure using a formula that assumes China’s foreign-exchange reserve expanding at between $30 billion and $40 billion a month, while appreciation of the yuan would be held to 7% against the U.S. dollar… About $20 billion of those funds have been invested so far, mostly in Hong Kong stocks.

    …HSBC said that [in 2008] Chinese authorities will likely approve $10 billion in overseas investments to mutual funds each month, while $67 billion will be invested through China’s sovereign wealth fund, or China Investment Corp., and $27 billion will come from the “through train” investment scheme, which is likely to come into effect during the second half. Fund outflows that have been approved but not yet utilized will make up some of the remainder…”

More Chinese activity can be expected in 2008, especially if fires-sale bargains present themselves to the small – but growing – group of increasingly well-funded, confident and savvy mainland corporates.

Whether they will be welcomed with open arms is yet to be seen, but if the lessons of the recent past have been taken on board (and it seems that, with more talk of minority stakes, use of foreign fund managers, and passive investments, they may have been) we may see a lot more Chinese money going overseas, and more Chinese firms integrating into the global economy, in the Year of the Rat.

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