M&A

Buy and scold

New scrutiny over state firms’ foreign purchases

CHINA-CONGRESS/

He has eye on deals: Wang Qishan

Chinese enterprises have been going global for a decade. In terms of assets, they have a large harvest. But failures have been more common than successes, especially for investments in areas like mineral resources.”

The view, offered by an official from the National Development and Reform Commission (NDRC) to the Economic Observer last month, chimes with previous coverage in WiC (see issue 113). Chinese firms have been critiqued for overpaying for foreign assets, struggling to execute deals once money has changed hands, and overestimating the potential for returns.

The learning curve has been steep and uncomfortable, which may have contributed to the drop in overseas investment activity by Chinese companies this year. Deal flow fell by more than a third in the first half to $27.6 billion compared to the previous six months, according to a study published by PwC in August.

The drop was also due to tighter credit conditions and policy uncertainty fostered by the handover to Xi Jinping and his new leadership team, PwC suggests.

Overseas investment continues to be dominated by state firms. Privately owned companies made up a little over a quarter of the total in the first half of the year but the drop-off in their activity (58%) was much more pronounced than the 15% fall among SOEs. PwC says private businesses have struggled to raise finance and may have decided that their time was better spent addressing challenging conditions at home.

A separate report from the China Enterprise Confederation confirms that the “going out” campaign is heavily focused on state enterprises, with 47 of the firms that report to state holding company Sasac accounting for 85% of the assets owned by the country’s 100 largest multinationals overseas.

Looking ahead, the concentration might be reduced, especially as the largest investor on the list – PetroChina – is embroiled in a major investigation into its parent, CNPC (see page 7).

PetroChina isn’t alone in attracting attention. China Metallurgical Corp (MCC) and Citic Pacific have also come under scrutiny for a squabble over a disastrous iron ore project in the Pilbara region of western Australia (see WiC163). The cost overruns on the mine are more daunting than ever, CBN has warned, with Citic facing an outlay of $11 billion, or more than four times its estimate when it bought the mine in 2006. Shoddy due diligence is getting most of the blame, although 21CN Business Herald says that other Chinese investors have underestimated the costs of building new mines too or failed to budget for associated infrastructure like roads, railways and ports. This has delayed payback periods. Some projects will never get into the black without “follow-up support from national policies”, 21CN adds.

Such failures contradict the idea that a small coterie of omnipotent bureaucrats in Beijing is pulling the strings on a ‘China Inc’ masterplan to achieve worldwide business hegemony (as WiC has pointed out before, state firms often bid against each other for assets, driving up the price).

The pursuit of former executives at CNPC is another indicator that Xi and his premier Li Keqiang want state sector bosses to be more accountable for their investment choices. As the biggest spender overseas, the oil industry is a good place to set an example and CNPC is top of the list for investigation. “Some overseas acquisitions that cost billions of US dollars were supposed to be quality assets but turned out to be poor once CNPC had splashed the cash,” an insider told 21CN a month ago.

The newspaper adds that some overseas purchases have a darker side, with significant sums siphoned off by corrupt executives into offshore nest eggs. That being so, Xi’s anti-graft campaigners may be more inclined to scrutinise state firms’ foreign forays more closely. In sum, WiC doesn’t doubt that the broader momentum of the go-global strategy is still in play. But 21CN reports that the NDRC – the state planning agency – has also lectured SOE executives that they will be held more accountable in future for failed deals. And with anti-graft tsar Wang Qishan likely to be taking more of an interest, expect China Inc to be a more cautious player in global M&A.


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