China’s big shopping-tour

Chinese companies realized a record of acquisitions abroad this year. In just the first 2 month of 2016, the chinese bought foreign companies in value of over 80 billion USD thereby clearly topping last year’s record figures.

What’s behind this buying spree? For once, the declining opportunities at home have spurred chinese investors to look abroad. Big real estate purchases, such as the famous ‘Waldorf Astoria’ hotel in Manhattan, made the headlines. But last year’s deals also saw a major expansion into western pharmaceuticals- biotechnology- agriculture- and food-companies.

The largest single chinese acquisition so far in 2016 was the purchase of swiss agrochem giant Syngenta by state owned China National Chemical Corporation – better known as ChemChina – for 45 billion USD in early February. It’s not their first european shopping-tour. In 2015, ChemChina bought italian F1 tyre-maker Pirelli for almost 8 billion USD.

Another remarkable deal was the purchase in January 2016 of Hollywood’s Legendary Entertainment, the maker of the ‘Batman’-movies, for 3.5 USD billion by Wanda Group and the first chinese acquisition of a major US film company. Behind Wanda is Wang Jianlin, one of China’s richest businessman. And just last week, a chinese-led investor group announced to buy the Chicago Stock Exchange.

So, is there a problem with Chinese companies buying western industries from Agrochem to Hollywood studios for assets that can speed their development at home and help them expand in global markets?

Many chinese acquisitions are aimed at obtaining technology or brands to expand the buyer’s market share in China or to capture profit from foreign goods and services flowing into China. And Chinese companies are simply looking for growth as the country’s domestic economy currently slows down quite significantly.

And to the credit of the chinese companies, one has to consider, that in contrast to western corporations that cut staff after purchases, chinese buyers usually keep employees and sometimes hire more staff because they want foreign skills and experience. That’s exactly the reason why Syngenta for instance opposed to sell the company to US-competitor Monsanto and opted for a the chinese buyer who granted a job-security in Switzerland for the next 5 years.

No problem: this is also Wall Street’s view, who has been lobbying to allow China to make big takeovers (and the banks can earn larger Merger&Acquisitions-fees). They and others argue that restricting China would be unfair and foolish because American companies have been allowed to invest billions in China.

After all, the chinese are also taking a risk with every purchase abroad. In 2012, the (as usually state-owned) company CNOOC paid 15 billion USD for Nexen, a large canadian oil & gas company based in Calgary. But then, the chinese suffered big from the slump in oil prices and on top of that have to deal with a costly pipeline spill in 2015.

US is ‘extremely concerned’

On the other hand, many view the chinese shopping tour more critical. Western investments in China are still restricted to high-risk start-up operations or minority ownership. It’s a fact, that for instance Coca-Cola or General Electric can’t take control of an existing, established Chinese rival while the chinese are allowed to take full control when buying a foreign company.

Because of Syngenta’s large presence in the US-market for seeds and fertiliser, the swiss/china-billion-dollar-deal is also being scrutinised heavily by Washington’s political establishment.
Tom Vilsack, agriculture minister in the Obama administration, said he had concerns about the deal and its impact on US competition for the Chinese market. ‘I have a watchful eye and continue to be extremely concerned about the way in which biotechnology and innovation is being treated and impeded by a system in China that is often times not based on science and appears to be more based on politics.’

According to ‘Bloomberg View’, dozens of members of the US- Congress plan to ask the Obama administration to review the planned acquisition of the Chicago Stock Exchange by a Chinese firm whether it poses a national security risk or a risk to the companies traded on the exchange.

The Chicago Stock Exchange announced that it would be sold to a consortium led by the Chongqing Casin Enterprise Group of China, a move that give the Chinese firm a foothold in the 22 trillion USD equities marketplace. But the exchange’s CEO, John Kerin, said he cannot publicly identify who owns Chongqing Casin and that the Chinese government may be a minority stakeholder.
If the U.S. government does look into this case, it will likely find that Chongqing Casin’s lack of transparency, combined with the systemic importance of the stock exchange, make this deal very questionsble.

And there is the issue of the capital outflow. Officially, the chinese government is doing everything to stop the sell of Yuan to buy USD, EUR or CHF also known as ‘capital flight’ which threatens to sap funds from China when growth is already weak.

But at the same, state owned companies do exactly this and buying up foreign industries at a record pace and record values. And even in this very insecure phase of the chinese economy, one fact remains is for sure. Bids like that by ChemChina for Syngenta are backed by the state, because no chinese company is buying a foreign corporation without the knowledge – and the blessing – of the communist party leaders in Beijing.

In a way, the chinese buying spree of 2015 and 2016 reminds me of the japanese of the late 80’s. And at about the same time, the japanese bought western prestige objects like the Rockefeller Center in the heart of New York or fancy film studios in Los Angeles in a rapid pace, the economy back home started to falter – and more than 25 years later is still in a deflation.

Is it different with China? Well, there are at least six economic-hotspots that pose the real threat, China could follow Japans bad example. If these hotspots are not tackled quickly and swiftly by the chinese authorities, the ramifications would shake the world’s economy pretty hard.

(This six economic hotspots in China, are coming up in tomorrow’s article)

February 2016: Chem China put 45 biilion USD on the table to buy swiss agrochem company Syngenta.