China investments meet bottleneck overseas

Updated: 2010-12-21 10:55

By Wang Chao (China Daily)

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BEIJING - Money cannot buy everything. That's what Chinese companies learned when they searched overseas for resources, be it oil, gas or iron ore, as a scarcity of mineral and energy resources becomes a growing concern in China.

The nation's economy has been growing at an annual rate of 8 percent during the 11th Five-Year Plan (2006-2010), but the supply in strategic resources has taken a big hit.

In 2009, China imported 628 million tons of iron ore - 68 percent of the world total export, an alarming sign that it is in need of metals. But rising prices for overseas iron ore in recent years have forced hundreds of Chinese steel companies to suffer. That year, oil imports climbed to 199 million tons, 51.2 percent of China's yearly oil consumption, making China the world's third biggest oil importer behind the United States and Japan.

"We have to invest in these strategic areas overseas, even if we lose money," said Zhang Wei, vice-chairman of China Council for the Promotion of International Trade (CCPIT).

"Since lack of strategic resources is a common problem in the industry, if we don't look for our supply overseas, the industry will lose its bargaining power with the world."

But this attempt to acquire overseas materials has come at a huge price. In 2008, Aluminum Corporation of China Ltd (Chinalco), together with US-based Alcoa Inc, spent $14 billion to purchase 12 percent of shares in Rio Tinto. Chinalco bought 9 percent of that, becoming the biggest shareholder of the company.

However, the share value plummeted by 75 percent in 10 months and Chinalco lost more than $10 billion.

Tao Jingzhou, a partner at Jones Day law firm, said that 90 percent of China's 300 overseas mergers and acquisitions (M&As) cases were not successful.

"Finishing M&As doesn't necessarily mean the deal is successful," Tao told China Daily. "First, we need to know if the purchasing price is reasonable; then we have to wait for at least four to five years to see whether the integration is going on well."

Based on Tao's experiences, Chinese companies merging with foreign companies usually lose their value by 40 to 50 percent.

Buying overseas resources is not only driven by needs for supply, but is also the major target for many Chinese companies' capital funds.

Wan Jifei, chairman of CCPIT, said that faced with the increasing investigations, anti-dumping and countervailing actions toward Chinese companies, investing overseas is an effective way to bypass trade conflicts.

In 2009, China's total exports accounted for 9.6 percent of the world total. They also encountered 40 percent of the total anti-dumping investigations and 75 percent countervailing actions in the world last year.

China Daily



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