Risky rewards for China’s overseas investment boom

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Risky rewards for China’s overseas investment boom
AFP NOVEMBER 19, 2014 3:33PM

A woman in a factory in China's Jiangsu province. Growth in investment into China is slow
A woman in a factory in China's Jiangsu province. Growth in investment into China is slowing, as investment overseas booms. Source: AFP
CHINA’S inexorable economic rise is set to see it become a net global investor after decades of Western money flowing into the country, but analysts warn the change offers risks as well as profits.

Chinese oil behemoth CNOOC’s $US15 billion acquisition of Canada’s Nexen, completed last year, was just a fraction of the $US625 billion the country has invested abroad, much of it resources driven and also taking in other sectors including agriculture, manufacturing and banking.

But the looming changeover may be a sign that China is becoming less attractive as an investment destination itself, while some deals have been less successful than others.

Chinese external acquisitions were strictly controlled until 2000 when the Communist Party listed overseas investment as a new growth strategy, widely described as “going out” to secure technology, resources and market access.

Overseas direct investment (ODI) has since ballooned — along with China’s foreign exchange stockpile — and reached $US90.2 billion in 2013, more than 30 times what it was a decade previously.

Incoming foreign direct investment (FDI) stood at $US117.6 billion last year, official data showed, and the latest figures yesterday showed the gap between them has narrowed substantially in 2014.

China invested $US4.19 billion in non-financial sectors in the US alone in the first 10 months of this year, the commerce ministry said, almost twice as much as the $US2.32 billion that flowed in the other direction.

“It is a matter of time before China’s overseas investment exceeds the foreign investment it receives,” assistant commerce minister Zhang Xiangchen told reporters last month.

“Even if it is not realised this year, it will in the near future. China is soon to become a net capital exporter.”

China is now the world’s third largest investor after the United States and Japan, according to the United Nations Conference on Trade and Development, and Beijing’s figures show the US and Australia as its top recipient nations.

But the spending spree has been largely driven by big state-owned enterprises (SOEs), backed by state banks as they purchase mineral and energy resources, sparking concerns over China’s growing economic power and possible political motives.

At the same time, some projects have not proved as profitable as hoped. Auto manufacturer SAIC Motor took a controlling stake in South Korea’s SsangYong Motor Company but lost several billion yuan when it went bankrupt and suffered a bitter strike, which ended only with a police raid featuring commandos rappelling from a helicopter in a hail of missiles.

Insurer Ping An saw its $US3.5 billion investment in European financial group Fortis wiped out in the global financial crisis of 2008.

Wang Jiahua, executive deputy chairman of the China Mining Association, an industry group, said 80 per cent of Chinese mining investment abroad had “failed”, the state-run Economic Information newspaper reported in June.

China Power Investment Corporation is reported to have lost at least 7.3 billion yuan ($US1.2 billion) on the controversial Myitsone hydropower plant in Myanmar, where President Thein Sein ordered the project halted in 2011.

Analysts blame Chinese investors’ inexperience and decisions driven by government policy rather than business sense.

Tao Jingzhou, managing partner of law firm Dechert LLP China, told AFP that the “primary cause” of problems was poor thinking, and failures to carry out sufficient due diligence.

“A merger and acquisition contract is logged as an achievement of the SOE (head) once it is signed,” he said. “It will be none of his business when it incurs losses in two years’ time.” Experts also caution that having more funds flowing out of the world’s second-largest economy reflects declining confidence in China.

“If capital finds the rest of the world more appealing on the whole, it indicates that opportunities in China are being prematurely closed off, most likely by government policy,” Derek Scissors, of the Washington-based American Enterprise Institute (AEI), told AFP.

Beijing has denied that a swathe of inquiries in sectors ranging from auto and pharmaceuticals to software are targeting foreign firms, but China’s growth has slowed in recent years, while land and labour costs have risen.

Equally, many destination countries are wary of Chinese investment, sometimes provoking angry accusations of bias by Beijing.

Analysts say private firms’ share of Chinese investment is rising and state-owned firms scaling back, so that “sensitivity about government involvement and thus scrutiny should also ease”, according to Brian Jackson of research firm IHS Economics.

But data compiled by AEI and the Heritage Foundation think-tank showed more than 100 projects or acquisitions worth $US100 million or more have fallen through for non-market reasons since 2005.

Chinese technology giant Huawei in 2008 abandoned a joint $US2.2 billion bid for US firm 3Com because of opposition by Washington’s Committee on Foreign Investment over security concerns.

Nexen buyer CNOOC earlier mounted a failed $US18.5-billion bid for US oil and gas producer Unocal in 2005.

Under a free-trade agreement sealed by Australia and China this week, Canberra has retained the right to examine all investments by Chinese SOEs, despite Beijing reportedly seeking an exemption for deals up to around $US940 million.

“A lot of buyers are irrational, pushing prices up and making people suspect whether China’s political, military or other ends are behind such deals,” said Tao.

AFP

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Leighton Holdings’ Chinese suitor for John Holland once accused of corruption

PUBLISHED: 5 HOURS 35 MINUTES AGO | UPDATE: 3 HOURS 21 MINUTES AGO

FTA to put rocket under Leighton’s John Holland sale
The Chinese company in the front running to buy Leighton Holdings’ John Holland business was banned from building any road or bridge projects for the World Bank three years ago after being accused of corruption.

China Communications Construction Company (CCCC), a state-owned enterprise, is believed to be the sole remaining suitor for John Holland after bids from other companies were rejected as being too low.

The signing of a free-trade deal between China and Australia has made a purchase of an Australian construction company more attractive for the Chinese group, because the agreement allows for Chinese workers to be brought into Australia to build projects.

However, CCCC’s ban from World Bank projects until January 2017 could raise red flags with state governments awarding infrastructure projects if the Chinese company were to acquire John Holland.

In July 2011, CCCC was prohibited from working on World Bank road and bridge projects because it was a successor to another Chinese firm, the China Road and Bridge Corporation (CRBC) that was banned in January 2009. CRBC became a wholly-owned subsidiary of CCCC following a corporate restructuring in 2005.

CRBC was one of six Chinese firms the World Bank barred for allegedly colluding in bidding for road projects in the Philippines.

None of the firms received any funds from the World Bank following the investigation.

The construction industry is regularly ranked among the world’s worst industries for corruption, and John Holland’s parent, Leighton Holdings, remains under investigation by the Australian Securities and Exchange Commission over alleged bribes in Iraq.

Amar Flora, chief operating officer for the University of Sydney’s John Grill centre on project management, said Australian governments will need to carefully review Chinese investments in Australian construction and infrastructure to ensure there is no link to corruption.

“Is the Australian government willing and capable of providing quality assurance on Chinese investment, and in ensuring that the Chinese investment complies with Australian regulatory frameworks?” Mr Flora said.

Australian rules on bribery are not as tough as in other countries, such as the UK, where failure to prevent bribery is a criminal offence.

However, Mr Flora also said Australian infrastructure would benefit from the new free trade agreement because China had a good track record on building projects quickly and within budget, albeit with cheaper labour.

“It could add some competitive tension in the construction and infrastructure labour market as supply from China can potentially increase, driving down wages in Australia,” Mr Flora said.

Gregory Hodkinson, the global chairman of engineering and design group Arup, forecast earlier this year that the current wave of Spanish investment in Australian infrastructure would be followed by a Chinese wave as Chinese companies move abroad.

The Australian Financial Review

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Chinese buying strategic stake in uranium producer... risky ambition?

Paladin stake ‘just the start’ as Chinese fund sees opportunity
THE AUSTRALIAN NOVEMBER 26, 2014 12:00AM

Barry FitzGerald

Resources Editor
Melbourne
CHINESE private equity fund Hopu Investment is on the hunt for more Australian opportu­nities following its $80 million stake in the uranium producer Paladin.

The investment — part of Paladin’s $205m recapitalisation plan — is Hopu’s first on the local scene.

Hopu is set to end up with 15 per cent of Paladin, although it did receive Foreign Investment Review Board approval to go as high as 19.9 per cent.

But senior managing director of the Beijing-based fund, Wendong Zhang, told The Australian that was not the intention.

He said securing the approval to go to 19.9 per cent was about being in a position to provide additional support to Paladin’s fundraising effort if the shortfall to the group’s entitlement issue was greater than expected.

Paladin’s recapitalisation with the help of Hopu, and its call on its shareholders, eases pressure on its medium-term funding requirements, including the $US300m ($349m) convertible bonds due in November 2015.

Mr Zhang said the Paladin investment was underpinned by the expectation that the uranium market was poised to rebound due to the resumption of nuclear power growth in China and elsewhere after the hiatus forced by Japan’s Fukushima disaster in 2011. He said the move on to Paladin’s register was the first of what could be more investments in the local mining and agricultural sectors.

“Our view is that the mining sector is going through a down cycle. So the next two to three years could be a very good window of opportunity for investment opportunities, which we are exploring in Australia and other countries,’’ Mr Zhang said.

“We are very different to the buyout funds. We try to be the facilitating, friendly and constructive investor that helps to add value by working together with the existing shareholders.”