Tuesday 9 June 2009
China’s got all that money and nowhere to spend it
China is ground zero for one of modern history’s greatest resource grabs. Massive investments in Latin America, Africa and Asia have delighted many politicians anxious to revive economic growth. In more developed economies, though, China is hitting its share of resistance or misfortune.
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China’s got all that money and nowhere to spend it
By WILLIAM PESEK JR
9 June 2009
Last week was a rough one for officials in Beijing. On June 4, commemorations of the 20th anniversary of the Tiananmen Square crackdown were splashed across global television screens as China struggled to keep its people in the dark. The next day brought more unwelcome attention - this time involving what would have been the largest single foreign investment by a Chinese company.
Rio Tinto Group scrapped a US$19.5 billion investment from Aluminum Corp of China. ‘We are very disappointed with this outcome,’ understated Xiong Weiping, president of Chinalco, as it’s also known.
There are many things to say about Rio Tinto rejecting China in favour of raising US$21 billion from a share sale and an iron-ore venture with BHP Billiton Ltd.
Here are three worth considering: China’s global ambitions are being stymied; the credit crisis is far from over; and China will keep coming.
First, China’s goal of securing resources to fuel its rapid growth is experiencing some setbacks. The collapse of the deal with Rio Tinto, the world’s third-largest mining company, is more than just a blow to a state-owned aluminium producer. It’s a humiliating wallop for cash-rich China. Its assertions that Rio Tinto was a purely commercial exercise never gained traction. That was especially so after Xiao Yaqing, a former Chinalco chairman and an architect of the deal, joined the Chinese government’s Cabinet after the deal was announced.
China is ground zero for one of modern history’s greatest resource grabs. Massive investments in Latin America, Africa and Asia have delighted many politicians anxious to revive economic growth. In more developed economies, though, China is hitting its share of resistance or misfortune.
In 2005, a bid by China’s largest offshore oil producer, CNOOC Ltd, for Unocal Corp was scuttled by the US Congress. Chinese officials also can’t be very happy with their multibillion-dollar investments in Blackstone Group LP and Morgan Stanley. And then, of course, there’s China’s US$768 billion of US Treasuries. Any major drop in the US dollar’s value will leave China’s government with huge losses.
For all the chest-thumping in Beijing about how China has leverage over the US, there’s little China can do but hope for the best. Here, Chinese regulators will be making a good call if they block General Motors Corp’s agreement to sell the Hummer sport-utility vehicle brand to Sichuan Tengzhong Heavy Industrial Machinery Co.
Is there really much of a market out there for gratuitous gas-guzzlers?
Second, the role of falling commodity prices, frozen credit markets and tepid demand for asset sales can’t be underplayed where Rio Tinto and Chinalco are concerned. Global trends are undermining the valuations of both companies.
All this talk of ‘green shoots’ in markets and economies won’t amount to much if financial systems don’t return to normal.
Once they do, the world needs to contend with central banks removing the vast waves of liquidity they pumped into markets over the last two years.
That adjustment will be as rough on acquisitive companies around the globe as the average 401(k) statement.
That also goes for a government sitting on top of about US$2 trillion of currency reserves. China’s deep pockets don’t trump chaos in markets.
Third, China isn’t likely to go away quietly in the long run. A unique feature of China’s economic model is a greater emphasis on acquiring overseas brands than creating indigenous names. Also, maintaining China’s growth will require ever-increasing amounts of commodities.
Pressure on China to boost its currency may speed up things. Every 10 per cent increase in the yuan’s value makes firms such as Chevron Corp - which purchased Unocal in 2005 - cheaper. Clearly, the US Congress would have issues with China buying the second-largest US oil company.
That might also go for Chinese bids for Boeing Co or Goldman Sachs Group Inc. Even so, a more acquisitive China will be an increasingly noticeable feature of global business in the years ahead. That will be especially true if predictions that China will surpass the US economy in 30 years or so pan out. It will be fascinating to see how world leaders respond.
Rio Tinto’s decision enabled Australian Prime Minister Kevin Rudd to dodge a political bullet. Mr. Rudd, a Mandarin-speaking former diplomat, and Treasurer Wayne Swan had yet to decide whether to allow the sale after a four-month review.
Saying no might have sparked diplomatic tension with China. Saying yes risked angering voters who voiced concern at selling mining assets to a company whose controlling shareholder is a communist government.
Nick Economou, a professor of politics at Monash University in Melbourne, was right when he called the Rio Tinto news ‘a get-out-of-jail-free card for Rudd and Swan; they will be leaping for joy’.
It’s safe to say that China’s leaders aren’t jumping for joy. If anything, they will learn from this latest setback, and fast. You haven’t heard the last of China’s overseas ambitions. -- Bloomberg
William Pesek is a Bloomberg News columnist. The opinions expressed are his own
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