China Stakes a Claim & ODI Goes Underground

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China’s overseas direct investment (ODI) has been building slowly but surely, as reported here. However, the news that China was jumping into the ring with BHP to take a stake in mining giant Rio Tinto came as a surprise to many (but not to all – see here). China seems to have gained a taste for international M&A, and its increasingly sophisticated and strategic approach is impressive. As CNN Money reports:

    “Chinalco said its and Alcoa’s (AMEX:AA.PR) (NYSE:AA) 14.05 bln usd joint purchase of a 12 pct stake in mining giant Rio Tinto is China’s biggest ever investment abroad — though the country’s largest aluminum producer did not say how much of the tab it will pick up.

    The Chinese firm and its US-based ally acquired their stake in Anglo-Australian Rio Tinto through Singapore-based Shining Prospect Pte Ltd, a wholly owned entity of Chinalco to which Alcoa has committed 1.2 bln usd via a convertible instrument.

    China’s recent large investment forays abroad have been made through sovereign wealth fund China Investment Corp.

    …Chinalco, the parent of Aluminum Corp of China Ltd, has invested abroad several times in the past year, in Australia, Peru and Vietnam, among other countries.

    The company said Lehman Brothers (NYSE:LEH) and China International Capital Corp are its financial advisers for the Rio Tinto deal”.

A China Business Services source with knowledge of the deal noted that it was brilliantly implemented, with support from the very top of government, in absolute secrecy, and that it was timed to ensure maximum disruption to BHP’s bid. It has also left option the option to mount a full bid, with backing of US$120 biilion from the state, as Reuters reports:

    “China’s state-owned aluminium group Chinalco will have access to $120 billion from the Chinese government as it prepares to fight the takeover of Rio Tinto (RIO.L: Quote, Profile, Research) by BHP Billiton (BLT.L: Quote, Profile, Research), The Sunday Times reported.

    …The Sunday Times said a $120 billion war chest will be made available to Chinalco through wealth fund the China Investment Corporation (CIC), which has made other overseas investments.

    …A source familiar with the situation told Reuters on Friday that China Development Bank, a separate arm of the government, had funded Chinalco’s $14 billion stake-building in Rio.”

Clearly China is getting more savvy at playing the ODI game. It even had the foresight to include a US investor. Business Spectator explains the US connection:

    “Back in 2001, China needed Alcoa. The US company was the clear world leader in aluminium and Aluminium Corporation of China, known as Chalco, was an upstart. Alcoa’s $200 million investment in Chalco’s IPO showed a senior player endorsing a promising junior. Times have changed. The economic power is now firmly on the Western side of the Pacific.

    …The Chinese certainly don’t need Alcoa’s cash. They don’t need its strategic wisdom either. Alcoa has been on the defensive for years – its failed 2007 bid for Canadian rival Alcan was a partial exception – while Chinalco has been confidently investing around the world.

    Alcoa still does have something to offer, though – its firmly American corporate bloodline. It’s not clear yet just what the Chinese plan to do with their Rio stake, but it’s unlikely that the investment is simply passive. If China ended up trying to buy sensitive assets on its own, it might have aroused a global furore. Some US cover could prove invaluable”.

In addition to the Rio Tinto investment, it was recentlly announced that mining major, Anglo American, has entered a tie-up with China – in the form of China Development Bank – in Africa. AFP reports:

    “A Chinese state bank and London-based mining giant Anglo American PLC have announced an alliance to develop natural resource projects, expanding China’s ties with Africa.

    China Development Bank and Anglo American will focus on China, Africa and other markets, the companies said Monday in a joint statement. They gave no information on potential projects or financial details.”

Another deal on the cards involves the major Australian iron ore mining company Fortesque:

    “State-controlled China Shenua Energy Co Ltd and government-owned fund, China Investment Corp, could be making their biggest investment yet in the resources sector outside the mainland if a reported plan to acquire a stake in Australia’s iron ore miner Fortescue Metals goes through.

    …China Shenhua’s reported plans for Fortescue and Chinalco’s acquisition of a Rio stake could be signs of China’s increasing confidence to use its wealth in ensuring sufficient supply of commodities to support its rapid growth, economists said.

    ‘There are two reasons for China to make these acquisitions — one is its excessive holdings of foreign reserves, which it is willing to use to for long-term investment, and the other is its great demand for commodities to support economic expansion,’ said Paul Tang, economist at Bank of East Asia (other-otc: BKEAF.PK – news – people ).

    …China Shenhua’s reported bid for Fortescue could be the nation’s next move to advance its cause of ensuring growth for its steel and mining industries.

    …Talks are at an early stage, the newspaper said. The stake could be worth over 2 billion US dollars, it said.

    …Analysts said the potential acquisition could be a way for CIC to diversify from the financial sector, where it currently has initial investments.”

The point made above about financial diversification is an interesting one, but it may tell only half the story. Big investments at the top end of the banking and financial services sector – where advice is given and big deals are made – combined with ever-increasing interests in resources could boost China’s indirect influence along with its direct control.

China has indeed staked a claim, and it could prove to be a rich seam.

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One Response to “China Stakes a Claim & ODI Goes Underground”

  1. Archive » A Challenge for Chalco?| China Business Blog Says:

    […] reported back in February on Chalco’s skillful purchase (with Alcoa) of 12 percent or Rio Tinto. But that was before the financial crisis and the collapse […]

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