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Non-financial acquisitions may increase this year

By Sun Xiaohua (China Daily)
Updated: 2009-02-23 08:01

More Chinese chief executives could soon follow Xiao Yaqing, who orchestrated China's largest overseas acquisition in 2008, by increasing their companies' overseas investments, particularly in non-financial sectors.

Xiao, although no longer Chairman of the Aluminum Corp of China (Chinalco), is in the limelight again at the beginning of the Year of the Ox as his company builds on his deal.

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Chinalco injected $19.5 billion into London-based Rio Tinto Ltd, one of the largest mining corporations in the world, on Feb 12, increasing the State company's stake in Rio from 9.3 percent to 18 percent. Xiao spearheaded Chinalco's move to join Alcoa and buy an initial stake in Rio for $14.5 billion, becoming Rio's largest shareholder. Xiao was just promoted as deputy secretary-general of the State Council, China's Cabinet, last week.

Chinalco's deal will not be the only one. PricewaterhouseCoopers (PwC) recently released a report predicting Chinese companies' overseas investment will rebound strongly, possibly in the second half of this year, should the global economy pull out of recession.

"Chinese companies still have money and government support to invest abroad. They are now simply putting their activities on hold until the overall global economic conditions become less volatile," said Xie Tao, PwC Transactions Partner in Beijing.

Chinese companies' interest in overseas acquisitions remains high and more deals will likely be executed in 2009, he said.

Some investment bankers are making even bolder forecasts. Rob Rankin, UBS Asia head of investment banking, said in December that Chinese outbound activity in some sectors may pick up much sooner than predicted, since collapsing currency and commodity prices could trigger deals.

Beijing sent signals at the end of 2008 encouraging non-financial State-owned enterprises (SOEs) to make international deals in 2009.

Chinese companies need to "get bold" with overseas investment, especially in the energy and resources sectors, said Zheng Xinli, vice-director of the Chinese Communist Party's Central Policy Research Office, the ruling party's top think tank, in late December, although he cautioned prudence on financial investments.

He also suggested the government use its $2-trillion foreign exchange reserves to encourage overseas mergers and acquisitions in strategically important sectors.

Li Rongrong, director of the State-owned Assets Supervision and Administration Commission under the State Council, urged SOEs to acquire "strategic resources, high technology, key equipment and top talents" at low prices brought about by global recession.

Chinese industrial companies, resource businesses in particular, responded to Beijing's signals with a busy winter of deal-making.

Wuhan Iron & Steel Co, China's third-biggest steelmaker, agreed in December to pay Centrex Metals Ltd 180 million Astralian dollars ($127 million) for 50 percent stakes in iron ore projects in Australia. The two companies agreed to develop South Australia's first deep water port on the Eyre Peninsula.

Shenzhen Zhongjin Lingnan Nonfemet Co, China's fourth-biggest zinc producer, bought a 50.1 percent stake of Perilya Ltd, an Australian zinc and lead mining company in December.

But analysts are reminding Chinese industrial investors to stay level headed and not rush into foreign countries looking for recession-induced bargains. Chinalco lost 74 percent of the value of its initial investment in Rio Tinto last year (though Xiao maintained the move was not a mistake).

International acquisitions are tricky and can easily backfire, said Ying White, senior counsel of he law firm Akin Gump Strauss Hauer & Feld LLP. She suggests SOEs join with private equity companies to reduce risks.