As a partially central-planned and partially market-based economy, China’s approach to acquiring non-Chinese assets is not understandable through a CNN headline. Through various agencies (e.g. National Development and Reform Commission), Beijing has promoted a type of “going out” policy which encourages China’s companies to invest abroad. Those investments have included natural resources, finance, technology, consumer brands and distribution channels. The general areas of China’s private and state-owned companies’ acquisitions are: 1) natural resources, 2) prestige deals, 3) acquisitions of foreign firms whose brand or technology can assist Chinese companies’ domestic positions, 4) bargain hunting, and 5) desperation deals for Chinese companies needing growth/distribution channels abroad because of tight margins at home (source: Dragonomics).
The big state-owned companies use the first two approaches. Private and/or entrepreneurial local state-owned companies use the last three approaches. The private and entrepreneurial companies have their own narrow interests. They have raised the flag of national interests only when it assists them individually and not on the direction of Beijing. In 2009, state-owned companies were big purchasers of resource assets, driven by Beijing wanting to control the states needs for economic growth. As commodity prices were low, this made sense. Australian veterans believe resource assets sold to Chinese companies were overvalued. Time will tell.
As China transitions into a mature, industrialized country, many acquisitions will be driven based on industrial policy (driven partly by the China investment Corp). For example, since January 2009, Beijing has released plans for 11 industries to be consolidated to smooth-out economic growth and increase domestic demand. Domestic companies will continue to acquire international assets to protect them or to provide more leverage during this consolidation phase (e.g. they will be the acquirer not the acquiree, such as Beijing Auto making bids for Opel and Saab).
Bottom line: In order to make a decision regarding the investment merits of China, investors should understand the internal and external investment strategies of Chinese companies and how they are spending shareholder capital. Their success or failure depends, in part, on internal party politics.
Always Asking, Never Assuming™
Christopher Holtby