China's troubled international deals
BUSINESSES around the world may be suffering, but China's largest company, PetroChina, announced its results on March 23rd. Glossing over a decline in earnings, it emphasised capital investments—new pipelines, refineries, marketing and acquisitions of new energy resources overseas.
Lots of luck with that last goal. As a national policy, all major Chinese companies are looking abroad for investment, but prospects for cross-border deals grow more precarious by the day. On March 27th Australia blocked China Minmetals's acquisition of OZ Minerals, a copper-and-gold producer, on security grounds.
That raised concerns about China Aluminum's (Chinalco's) large investment in Rio Tinto being scratched as well. Ominously, a ruling by Australia's foreign-investment review board that the transactions are in the “national interest”, which is necessary for their approval, has been postponed. Perhaps as a sop, a less significant iron-ore transaction was approved: Hunan Valin Iron and Steel was allowed to increase its stake into Fortescue Metals, a troubled and heavily indebted operator with a far less valuable mining concession than Rio's and excellent political ties.
Committed to China?Anti-investment forces in Australia were emboldened when China blocked Coca-Cola's $2.4 billion purchase of Huiyuan, a juice producer, using a new anti-monopoly law that increasingly looks like nothing more than an impediment to foreign buyers. Coke's rejection was unique only in the method used, and the lengths to which the company gone to establish its commitment to China—it gave billions of dollars in investment and support of the Beijing Olympics even when other companies were bailing out.
Over the past two years, Chinese authorities have blocked numerous transactions on one (often novel) pretext or another, including Carlyle Group's efforts to buy a tractor company and a bank, and a Goldman Sachs's stake in an appliance manufacturer. A filing with the Hong Kong stock exchange on March 26th revealed that even Warren Buffett's widely publicised investment in BYD, a Chinese car-and-battery manufacturer, has yet to be approved.
Only four years ago, America's government barred CNOOC, PetroChina's sister company in China's energy oligopoly, from investing in Chevron. That was widely decried in China (and elsewhere) as xenophobic and, given the West's desire to invest in China, hypocritical as well. Even then, however, China's position was compromised by restrictions in its own laws, which prevented foreign companies from acquiring outright many types of Chinese companies, including banks, airlines, steel producers and energy firms.
Over time, China's hunger to complete cross-border deals has grown along with its financial resources, but the underlying legal contradictions, both domestic and foreign, remain. This is troubling for China and the world: acquisition targets are parched for funds.
OZ Minerals's position is so dire that on March 31st it needed to receive waivers from banks or potentially go into liquidation. No government official wants to see miners on the dole and financial institutions stuck with bad loans, but clearly a quick sale to a Chinese company is not considered a solution. And Australia is hardly unique—a bid by a Chinese company for a high-tech outfit in Europe or American would have a tough go.
Where China has been able to conclude deals, it has been directly with governments, notably Venezuela and Russia, and this illustrates the common element in all of these efforts—they are effectively bilateral deals between states, despite the involvement of nominally private companies. Australia's competition authorities went so far as to make this explicit when granting approval to Chinalco's investment into Rio on March 26th, saying its evaluation was done assuming that Chinalco and the Chinese steel makers who purchase Rio Tinto's ore are all subsidiaries of a single entity—in effect, China Inc.
Chinalco contends this is a misunderstanding of China's state-owned enterprises, which operate independently. To some extent this is true—Chinese companies do compete with each other—but it is also false: they follow government policy, have government-appointed management and enjoy privileged access to the vast Chinese market. These issues have been aired before in Asia, most notably in the case of Singaporean companies, but China's wealth, and scale, and the opacity of its government and laws put them in starker relief. What should the rules be for treating dynamic business that are appendages of a sovereign state? At the rate governments around the world are nationalising industries, the answers will be applicable to more than just China.