'Go Global' pushing up China M&A

Updated: 2013-12-03 12:24

By Michael Barris in New York (China Daily USA)

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China, expected to overtake Japan as No 1 in overseas mergers and acquisitions this year, is seeing deal volume rise as its leaders push companies to "go global", an analyst said.

"The new leaders have signaled to the world that they want Chinese companies to compete more in the global market," Yingying Xu, an economist with the Manufacturers Alliance for Productivity and Innovation, an industry trade group, told China Daily on Monday.

"They want to open their market more, especially to outside companies. From that perspective, you can say the new leaders give more hope to Chinese domestic players to go overseas to compete in the global market," Xu said in an interview.

At this juncture in 2013, Chinese companies have made $56.2 billion in overseas M&A deals, led by Shuanghui International Holdings' $7.1 billion purchase of Smithfield Foods Inc. Other US transactions have included Fosun International's agreement to pay $725 million for One Chase Manhattan Plaza, the 60-story former world headquarters of Chase Manhattan Bank in New York's financial district, and Beijing real-estate tycoon Zhang Xin's acquisition of a 40 percent stake in the General Motors office tower in midtown Manhattan for a reported $1.4 billion.

In a non-US deal, China Construction Bank Corp earlier this month agreed to buy a 72 percent stake in Banco Industrial e Comercial SA for about $720 million.

While all that is below last year's $62.1 billion total, it handily beats the $40.7 billion of deals done by Japanese firms this year, according to data provided by Thomson Reuters.

Energy and power still dominate China's outbound deals in value terms, though their share of overall global M&A activity has fallen to 44.1 percent from 52.3 percent five years ago, the data show. By contrast, the proportion of financials has risen by two-thirds to 14.4 percent.

Xu, who wrote a July 2012 report for MAPI estimating that China would invest $1.2 trillion globally over the coming decade, said a recent promise by China's government to relax overseas investment policy should help boost M&A deals in 2014, as Chinese companies continue to cast their net beyond their borders to get new sources of revenue growth and global brands.

In the interview, Xu said M&A activity in China will "definitely" grow next year and through the rest of the decade, particularly if financial-sector reforms discussed at last month's four-day conclave of Communist Party leaders last month materialize. "If they are more open about their capital accounts, they will allow China's domestic firms more freedom to invest in emerging markets," Xu said.

The economist, who is a native of Wuhan, in Hubei province, and a Peking University graduate, said that in previous years Chinese companies faced "lots of obstacles" when they tried to get government permission to invest overseas.

The results of last month's Third Plenum, in which China's leaders promised to bring "decisive" changes to the financial sector by 2020, "may provide more incentive to Chinese companies to invest overseas," Xu said.

China needs the cross-border deals, she said. "For some industries that have bad overcapacity issues, they are trying to expand into global markets to get more customers to buy their products." Other companies, she said, are "trying to upgrade to improve their profit margins, which means they are not satisfied being just an assembler for multinational companies in developed countries. They are trying to get more technology and learn more about management and design and marketing, distribution and the service side of manufacturing".

The Third Plenum came two months after China's State Council said it would use a newly established Shanghai free-trade zone as a testing ground for reforms in the service and financial sectors.

Other experts echoed Xu's claim that easing the limitations on foreign direct investment is the key to unlocking a surge of cross-border deals.

Vikram Nehru, chair of the southeast Asian studies department at the Carnegie Endowment for International Peace in Washington, told China Daily that the cross-border acquisition outlook in China is constrained by some countries' reluctance to permit acquisitions by Chinese state enterprises and by Chinese government limitations on direct foreign investment in other countries.

Those problems exist despite the "considerable pressure" building in China for domestic savings to "flow abroad and seek higher returns through outward foreign direct investment", Nehru said on the eve of Smithfield Foods shareholders' historic vote on the company's pending takeover by Shuanghui - the largest Chinese takeover of a US company,

"Reforms of China's financial sector, and gradual opening of its external capital account," will help improve other nations' receptivity to Chinese acquisitions, Nehru said.


(China Daily USA 12/03/2013 page1)