Crimson tide

Somewhere in China – nestled perhaps in a bureaucrat’s drawer – WiC would like to imagine there is a yellowing, 30 year-old document entitled China’s Economic Masterplan. We suppose it would read:

One: Deng Xiaoping promotes an “opening up”. Two: foreign capital pours into the Pearl River Delta and Shanghai and its hinterland. Three: factories spring up, in which low-wage workers churn out exports for international markets. Four: China emerges as the workshop of the world.

A simplified view but still a reasonable stab at how China has powered the first three decades of its ‘economic miracle’: with significant injections of foreign capital.

But now, perhaps, the story is finally changing: speculation is growing that 2009 might be the first year in which investment by Chinese firms overseas surpasses that of international firms in China itself.

HSBC is forecasting $110 billion of Chinese overseas direct investment (ODI) for 2009, versus $80 billion of foreign direct investment (FDI) flowing in the other direction. If the prediction is correct, the country’s most famous label – “Made in China” – might be in need of a redesign, to something closer to “Made by China – Abroad.”

So China Inc is coming to a location near me?

Chinese firms seem to be reaching for their cheque books with a new determination.

Sinopec is currently completing its takeover of Addax Petroleum for $7.3 billion and CNPC is said to be close to a $14.5 billion deal for the Argentine unit of Spanish oil company Repsol.

The Chinalco bid for a larger chunk of Rio Tinto collapsed in acrimony in June, but a series of other Chinese acquisitions in the international mining sector have gone through in the last 12 months, including Minmetals $1.2 billion purchase of Oz Minerals. Last week also saw CIC bid for a stake in Canada’s Teck Resources.

There have been investments in financial firms too, and the automotive sector is abuzz with rumours of Chinese companies close to completing transactions for the Hummer, Opel and Volvo brands.

The list goes on…

Why all the activity now?

Beijing is taking on a more assertive international role and wants Chinese companies to be more proactive in seeking out overseas opportunities too. Since May, the authorities have made it easier for firms to spend money overseas, allowing local agencies to green light more deals.

There is also the $2 trillion of forex reserves burning a hole in Chinese pockets, as well as the ongoing quest for hard assets like natural resources and energy. International asset values also look competitive in the wake of the global economic crisis.

But events at home are also having an impact?

Companies are realising that they need to widen their horizons. The benefits of boosting year-on-year performance through scaling up (and churning out ever larger volumes) are tapering off, especially as slumping international demand hits exports.

While the gap between inbound and outbound investment has been narrowing, a slowdown in FDI is also playing an important role. Foreign investment in China has been shrinking for the last eight months, with year-on-year declines of 20%. This is creating “unprecedented difficulties” according to vice commerce minister Chen Jian. Foreign invested enterprises account for 21% of total tax revenue and 55% of exports, says the website ChinaStakes.com.

All the same, booming ODI still marks a sea change?

The Chinese press is keen to play this down, arguing that, although the number of ODI cases is on the up, the average volume per transaction is decreasing. Most do not expect a landmark moment this year.

Perhaps this is a party line. China’s critics promote images of a nation salivating like Pavlov’s dog over new M&A opportunities. This has contributed to overseas political opposition to some of the larger deals, as the failures with Unocal (2005) and Rio Tinto (this year) have demonstrated.

Fears of foreign domination are nothing new, report Daniel H. Rosen and Thilo Hanemann in a June 2009 policy brief for the Peterson Institute of International Economics. The Europeans were worried about a wave of US corporate takeovers in the 1970s and the Americans felt something similar at the perceived threat from corporate Japan in the early 1990s.

But China in the bogeyman role is a new departure. The apparent favouring of state-owned enterprises seems (to some) to give the villain’s cloak a more menacing cut.

Still, Rosen and Hanemann show that between 2000 and 2007 Chinese ODI stood at less than 1% of the global total (below Russia’s). Less than two year’s ago, China’s total ODI was in line with Austria’s – and no one is claiming that we have much to fear from the good folk of Vienna.

But the momentum shift is what is significant now?

Quite probably; and others will soon be joining the Austrians in the Chinese rear view mirror.

But China still trails the US in accumulated ODI stock by a factor of 30. And there is still $5 of directly invested assets under foreign ownership in China for every $1 of Chinese direct investment overseas, according to the Petersen Institute.

Some argue that China can grow its ODI share quickly, by using some of its foreign exchange reserves. But this is hardly a straightforward move, and to plough forex holdings into overseas acquisitions would also bolster those who think Beijing’s instincts are mercantilist.

Besides, for all the talk of a crimson tide of Chinese capital washing up on foreign shores, the early forays have been disappointing ones. SAIC, Lenovo, and TCL have all struggled with their acquisitions.

A testy exchange between China’s vice premier Wang Qishan and the CEO of machinery manufacturer Sany on the sidelines of the National People’s Congress in March illustrates local caution.

Stung by criticism that the government should offer more support for Chinese investment, Wang ridiculed Sany Heavy Industry’s capacity to manage outside China: “If the other side’s engineers resign, are you really going to send people from Changsha [Hunan’s capital] overseas, and make the whole company speak Hunanese?”

Wang’s point is valid; but few doubt the era of ODI has begun. And the trend can only gather pace.

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