Monday 9 March 2009
Caution advised as cashed-up China eyes global asset fire sale
As the global financial crisis brings banks, insurers, carmakers and resource companies in the United States and Europe to their knees and sends asset values plunging, mainland leaders and executives have been inundated with proposals about picking up bargains in the great fire sale.
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Caution advised as cashed-up China eyes global asset fire sale
Wang Xiangwei
9 March 2009
As the global financial crisis brings banks, insurers, carmakers and resource companies in the United States and Europe to their knees and sends asset values plunging, mainland leaders and executives have been inundated with proposals about picking up bargains in the great fire sale.
But the mainland leadership should resist pitches by international investment banks and exercise great caution in approving overseas acquisitions to prevent mainland firms biting off more than they can chew.
The leaders are under growing pressure at home to diversify the country’s nearly US$2 trillion worth of foreign exchange reserves, of which about US$1 trillion is invested in US government bonds and other securities.
To that end, Chinese leaders signed multibillion-dollar oil deals last month with Russia, Venezuela and Brazil.
On the corporate level, mainland energy conglomerates and metals traders are already on the move. Aluminum Corp of China, the country’s top aluminium maker, raised the mainland’s overseas investment game last month by agreeing to plough US$19.5 billion into the Anglo-Australian mining group Rio Tinto.
China Life, the mainland’s biggest insurer, also took a serious look at - but walked away from - bidding for American International Group’s Asian unit due to worries about the quality of the business, China Life chairman Yang Chao confirmed last week.
In the past few months, as troubled US carmakers have sought to offload assets, hardly a week has gone by without reports that mainland carmakers are planning to buy international brands such as Volvo, Hummer and Saab.
In his government work report last week to the annual session of the National People’s Congress, Premier Wen Jiabao said the leadership would continue to implement a “go global” strategy, supporting “all kinds of competent Chinese enterprises to invest overseas and undertake international mergers and acquisitions”. Indeed, the falling value of assets presents a great buying opportunity, particularly in energy and resources.
And, with their economies in recession, foreign governments are more willing to welcome mainland cash as political or nationalistic opposition becomes more muffled.
However, as they send buying missions abroad, officials should also take the opportunity to prod foreign governments to relax controls on hi-tech exports to the mainland. There really is no better time to do this.
They should also stay away from financial or manufacturing assets, no matter how tempting the prices.
As the global financial crisis deepens with no sign of bottoming out any time soon, western banks and insurers are nothing but toxic assets. The mainland should never forget the lessons from its disastrous investments in Blackstone, Morgan Stanley and Fortis.
Those lessons should give the central government a clear reason to see through ridiculous proposals floated by international investment banks to buy failing American carmakers.
Apparently, many mainland carmakers, including Geely and Chery, the most aggressive ones, are tempted. While deals like this make great headlines, they do not make any sense.
First of all, there has been hardly any successful precedent created by smaller carmakers taking over bigger ones. The mainland’s first major overseas auto acquisition proved a total disaster. The Shanghai-based SAIC Motor Corp, the mainland’s biggest carmaker in terms of financial strength and management, could lose its US$500 million investment in Ssangyong Motor after South Korea’s smallest carmaker filed for court protection last month.
Second, mainland carmakers lack the international experience and expertise to run a foreign carmaker with sales networks in dozens of countries. Neither do they have any idea about how to deal with powerful labour unions, an essential skill given that high labour costs are partly to blame for the falling fortunes of foreign carmakers. Suggestions that one mainland carmaker is interested in GM’s Hummer unit are even more ridiculous.
In an age of increasing awareness of environmental protection and fuel economy, it would be an incredibly stupid move for any mainland firm to buy the maker of gas-guzzling, off-road vehicles.
While staving off overseas acquisition ambitions, the central government should instead take advantage of the economic slump to encourage consolidation of mainland carmakers to make them bigger, better and stronger. This would help them prepare for overseas adventures in future.
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