Fu Ziying, Vice-Minister of Commerce, said at the sixth annual China Import & Export Enterprises conference held on April 26th, that the influence of the US subprime crisis was spreading from the financial sector to the development of the real economy, such as consumption and investment, and that China was facing a shrinking external demand.
However, “the subprime crisis has caused a liquidity crunch in the US financial markets, plunging many renowned enterprises and research institutes into temporary distress, thus presenting interesting M&A opportunities for Chinese enterprises. Successful acquisition of these overseas enterprises with famous brands, powerful international marketing networks, and strong research and development abilities will go a long ways to raise the international competitiveness of Chinese enterprises,’’ said Fu Ziying.
While the US subprime crisis has brought the valuation of US enterprises down, the RMB appreciation against the USD is accelerating with the Chinese currency already having appreciated by 4.6% since the beginning of this year.
Historically, both Japanese and German businesses have had great successes in M&A when their own currencies were appreciating, making overseas assets relatively cheaper. Over 99% of Chinese export enterprises use the US dollar when selling their products overseas. The constant RMB appreciation has been cutting down these companies’ profits. It is under such circumstances that FU Ziying believes that Chinese enterprises should actively expand the scale of their overseas investment and develop overseas production as well as exports.
Maintain Export Growth, Continue Expanding Imports
During the first quarter of this year, China’s exports growth to the US and the EU, who have both been affected by the subprime crisis, dropped by 15 and 10.3 percentage points respectively.
Since China’s dependency on foreign trade exceeds 2/3, China’s foreign trade policy, which’s aim it is to promote steady export growth, will be subject to paramount change this year. “Labor-intensive industries, such as light industry and textile, make great contributions to China’s employment level. So we should maintain stable export growth in these industries,” said Fu Ziying.
Meanwhile, the government is continuing to reduce exports of products that are highly polluting and resource, or energy intensive, by cutting export tax rebates, imposing tariffs, and increasing market access.
As China is still suffering from unbalanced international trading account, it will continue to increase imports. Zhang Xiaoqiang, Vice-Director of the National Development and Reform Commission, said that the government should especially increase the imports of raw materials, energy, key components of high-tech products and technologies; and try hard to reduce import costs, therefore helping to reduce domestic market prices.
Seize the Opportunity for M&A
“Rio Tinto’s acquisition of Alcan, and MittalSteel’s acquisition of Arcelor, has taught us a good lesson. If we don’t make moves when international giants have accelerated M&A operations, little room will be left for our future development,” said Xiao Yaqing, General Manager of Chinalco, a Chinese aluminum giant, when explaining the motivation behind overseas M&A.
China is obviously more interested in resource assets than other types of investments. China Minmetals Corporation, jointly with the Jiangxi Copper Co Ltd, has bought a 100% stake in the Northern Peru Copper Corp, whilst Chinalco, jointly with Alcoa, have bought a 9% stake in Rio Tinto.
PingAn has just bought a 50% stake in Fortis Investments, a subsidiary of the Fortis Group, for 24.02 billion Yuan, thus becoming its single biggest shareholder. This is the first time that a Chinese insurance company has invested in a global financial institute. Last year, the Chinese Investment Corporation invested $3 billion in US based Blackstone, and the Chinese Development Bank bought into Barclays Bank based in the UK. Last October, the Industrial and Commercial Bank of China (ICBC) acquired a 20% stake in the Standard Bank of South Africa for $5.5 billion, marking the largest overseas acquisition ever made by a Chinese financial institution. The Bank of Communications and the China Minsheng Bank also declared that they would conduct overseas acquisitions this year.
However, China’s financial institutes still remain quite prudent. ICBC Chairman, Jiang Jianqing, said ICBC was still a green hand in overseas M&A, and was very careful in every step of overseas acquisitions.
Although distressed financial assets are very attractive investments, Guo Shuqing, Chairman of the China Construction Bank, said that the subprime crisis, which has reduced the valuation of some overseas banks, is not simply a good chance for overseas M&A. The bank must also consider credit, assets, and customer risks, as well as whether or not the acquired asset will help the overall company’s business plan, customer services and talent cultivation. The downsizing of Wall Street is a good opportunity for China to attract overseas financial talents.
It has now become apparent that China’s overseas M&A operations, which used to focus on manufacturing industries, such as household appliance, cell phones, and the automobile sector, has now switched its focus to the financial and resource sectors.
(Ministry of Commerce of PRC) |