Analysis: China readying for M&As abroad
By Sonia Kolesnikov-Jessop
UPI Business Correspondent
Published 12/8/2003 10:58 AM
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SINGAPORE, Dec. 8 (UPI) -- In the last month, China appears to be speeding up the liberalization of its capital account, which some analysts have taken as an indication the country it set to launch major overseas mergers and acquisitions next year.
Guo Shuqing, head of the State Administration of Foreign Exchange, suggested last week that Beijing would gradually and selectively ease controls on some items of currency convertibility under its capital account regulations.
Most of the measures indicated by Guo in his comments had already been mentioned by the central bank governor Zhou Xiaochuan a few months ago. The government is expected to encourage local companies to invest abroad and multinational companies to transfer spare capital abroad, while facilitating Chinese companies' foreign capital fundraising possibilities for their overseas operations.
Non-bank financial institutions such as insurance companies would also be allowed to make securities investments abroad.
Deutsche Bank economist Jun Ma believes that for equity investors there are two important messages: the government will allow qualified non-bank financial institutions (NBFIs) to invest in foreign securities; and the government will continue to "explore" a Qualified Domestic Institutional Investor (QDII) scheme to allow individuals to invest money into overseas bourses via selected institutions.
"On the first point, we understand that the new scheme will mainly involve Chinese insurance companies. Other non-bank financial institutions either have more limited investable foreign currency assets or will not be permitted to invest in equities," Ma explains.
By end-October, the outstanding foreign currency assets of Chinese insurance companies amounted to about $3.5 billion and Ma expects this figure to rise to about $7 billion by the end of the year following the overseas IPOs of two insurance companies.
This latest measures come in addition to improving the regulatory environment of the current account, economists note.
"The measures are clearly designed to reduce China's balance of payments surplus and ease the pressure on the renminbi. This is in line with our view that Beijing's main focus will be on adjusting the capital account, not the exchange rate, in the near future," says Dong Tao, economist at CSFB.
"Capital account restrictions are to be eased further and many Chinese companies will be engaged in overseas mergers and acquisitions," Dong predicts.
As China's capital account is currently closed, international mergers and acquisitions must be approved on case-by-case basis. As a result, mainland enterprises have only invested an estimated $27.6 billion abroad, a very small amount by international standards. However, the country is fast becoming one of the quickest-growing sources of foreign direct investment in the world.
According to a survey released this summer by the German management consultancy Roland Berger Strategy Consultants in Beijing, China's outward investments are poised for more rapid growth as China's capital account is gradually liberalized.
Most top companies are expanding because they want to go global, but so far have tended to establish startup operations overseas instead of acquiring existing players.
However things have been slowly changing since last year, when the then-president Jiang Zemin announced plans to "encourage and help relatively competitive enterprises" to invest abroad, under a policy called "Go Out."
"China has never been a big player in the international M&A market, but this may well change next year. Given how quickly China is piling up its foreign reserves and how much pressure the renminbi is facing, I suspect China will be a big player from day one," Dong says.
This year, CNOOC, China's sole offshore oil operator, bought Repsol's oilfields in Indonesia for $585 million, while oil and gas producer PetroChina has paid $82 million for half the stakes of the U.S.-based Amerada Hess Indonesia Holdings (having already bough last year a stake in 6 Indonesian oil fields from Oklahoma-based Devon Energy for $200 million).
Further mergers and acquisitions are expected in the oil sector and some experts are currently speculating that Chinese companies might be interested in investing in Libya.
China's telecommunications operators are also said to be looking abroad. In March, fixed-line operator China Netcom bought regional undersea cable operator Asia Global Crossing, and now another fixed-line operator China Telecom is said to been talking to Indonesia's Rajawali group on the possible purchase of Excelcomindo, Indonesia's third-largest mobile operator.
Mobile operator China Unicom has also indicated its interest in taking a minority stake in an overseas network, possibly in Indonesia or India.
Meanwhile, Guo also reiterated that China would gradually improve the "exchange rate formation mechanism".
"What is new and more interesting is that he highlighted the need for the exchange rate to reflect 'market demand and supply' and to play a positive role 'in resource allocation'. These remarks, and the fact that Guo made them just a few days ahead of Premier Wen Jiabao's visit to the U.S., more clearly signaled China's willingness to move towards renminbi flexibility and its intention to maintain cooperative relationship with the U.S.," Ma predicts.
Ma believes there is a good chance that China will widen the trading band in 2004 but the magnitude of the annual average appreciation of the currency will be contained at around 3 percent.
Many economists also believes China will eventually introduce a QDII scheme to allow individuals with foreign currencies to invest in foreign equities, although this might not happen in the near future.
"The government needs to balance the need to alleviate the appreciation pressure on renminbi and the principle of maintaining stability of the domestic stock market. This means that the timing of the QDII introduction will be very dependent on A share market sentiment, which is unlikely to turn hugely bullish in the near term," Ma says.
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