China Foreign Deals Must Obey Market Principles, Regulator Says

Chinese companies making foreign acquisitions must obey market principles, follow “international rules of the game” and play down national interest, the nation’s foreign-exchange regulator said.

With China facing a window of opportunity to venture overseas, businesses must bear in mind return on investment, costs and cash flow, Yi Gang, head of the State Administration of Foreign Exchange, said yesterday at a forum held at Peking University’s China Center for Economic Research.

“It would seem unnecessary to remind people about these basics, but it needs to be done in China,” Yi said.

China, which holds $3.2 trillion of foreign-exchange reserves, has been encouraging companies to buy assets overseas through a “going out” strategy to secure energy and commodity resources, buy technology and build internationally competitive businesses. Non-financial outbound investment rose 48 percent in the first half of the year to $35.4 billion while inbound investment fell 3 percent, commerce ministry data show.

“Chinese companies have a good chance to venture abroad as many European and American companies are struggling,” market valuations have “fallen significantly” and “overseas regulators are becoming more friendly to Chinese capital,” Yi said. At the same time, “everyone, whether they be a state business manager or a private business owner, starts his story with ’I want to do something for China’ or ’I want to buy resources for the country’,” he said.

Energy Acquisitions

China’s cumulative non-financial outbound investment at the end of 2011 was $322 billion, according to commerce ministry data released in January. The country will invest $1 trillion to $2 trillion overseas in the decade to 2020, the Rhodium Group, a New York-based firm that researches trade with China, said in a report last month.

Resources and energy made up 92 percent of China’s overseas mergers and acquisitions in the first quarter, according to a separate report from Hong Kong-based A Capital, a private-equity fund. China Petrochemical Corp. accounted for the largest deal, with the $4.8 billion purchase of a 30 percent stake in Galp Energia SGPS SA’s Brazilian unit.

While China Development Bank Corp., a state-owned policy bank, is at the forefront of providing financing for overseas deals, the foreign-exchange regulator has an entrusted loans office that makes foreign-currency loans to state banks and companies to help their overseas development and acquisitions.

Low-Cost Financing

Some companies not only ask for money, they also want “very low or even zero interest rates,” said Yi, who has a doctorate in economics from the University of Illinois. “Some say ’I am using the money to buy oil for our country, and you are investing the money in U.S. Treasuries, so you must provide me very low-cost or even zero-cost financing’,” Yi said, without naming any companies who have sought financial support.

China, the largest foreign U.S. creditor, boosted its holdings of U.S. Treasury securities to $1.1696 trillion in May, data released July 17 show. Yields on five-year Treasury notes fell to a record low July 20, declining three basis points, or 0.03 percentage point, to 0.57 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices.

China’s attempts to buy foreign assets have met with resistance. Opposition from U.S. lawmakers has derailed deals including a 2005 bid by Cnooc Ltd., the Hong Kong-listed unit of China’s largest offshore energy explorer, to buy California’s Unocal Corp. for $18.5 billion. Huawei Technologies Co., abandoned a joint bid with Bain Capital LLC for computer-equipment maker 3Com Corp. in 2008.

Africa Boost

Iceland’s government last year denied Chinese billionaire investor Huang Nubo permission to buy land in the island’s north, saying such a transfer of property would be “incompatible” with the country’s laws.

President Hu Jintao announced July 19 the country will offer $20 billion in new loans to Africa for infrastructure and manufacturing, underscoring China’s push to tap the continent’s natural resources and deliver its goods to African markets. China has invested more than $15 billion in Africa with projects covering 50 countries, Hu said, according to a Xinhua News Agency report detailing the pledge made at the Forum on China-Africa Cooperation in Beijing.

Speaking at the same conference, South Africa’s President Jacob Zuma warned that Africa’s past experience with Europe “dictates a need to be cautious when entering into partnership with other economies.”

Yi, who is also a deputy governor of the People’s Bank of China, said companies need to play down the role of the government in overseas acquisitions.

“In Africa, Latin America, Central Asia or our neighboring countries, the topic of resources is always a highly politicalized issue, and if you want to buy resources in a high-profile way, it will easily become a target for local government, the public, the media and politicians,” Yi said. “Imagine, if a foreign company wanted to buy a large amount of land in China, what would be our response?”