China buying up as many global assets as it can, while it can
Thursday, April 30, 2009 E-Mail this story Free Headline Alerts
Following is an excerpt from the weekly Asia Investor column by Sol W. Sanders in East-Asia-Intel.com.
Beijing is trying to use its treasure trove of U.S. debt, its holdings of some $2 trillion in currency reserves, mostly in dollars, to go bargain-hunting for assets in the worldwide credit crunch and recession.
Lou Jiwei, head of China Investment Corporation (CIC), said he is headed back into Europe with his $200 billion sovereign wealth fund to pick up new deals. In a sarcastic speech to a businessmenÕs forum on the southern island of Hainan, Lou said he was glad that foreign companies had rejected some of the CIC initiatives in 2008 Ñ before the crisis Ñ because they were wary of the political implications of Beijing government direct investment. That, he said, had saved him from losses.
Meanwhile, Chinese oil companies are also in a bitter worldwide competition with Western multinationals for access to new reserves, even during a period of collapsed oil prices with still-falling demand.
Chinese oil and mining companies, all either directly or indirectly government-owned, already have made $23.2 billion in overseas acquisitions this year.
But the Chinese are running into resistance, or so they say.
Fu Chengyu, head of China National Offshore Oil Corporation (CNOOC), said many Western countries did not want to let oil and gas assets fall into the hands of Chinese companies.
ÒMost governments arenÕt really promoting free trade. The politicians, especially in some developed countries, say one thing but do another,Ó Fu charged.
The Chinese government companies have deployed two strategies in response to the opposition. First, they are swapping dollar loans for future crude oil shipments.
Beijing has lent $25 billion to two Russian oil groups in return for 300,000 barrels of oil per day. In Brazil, Sinopec and PetroChina can buy up to 160,000 barrels a day from Petrobras, the largely government-owned Brazilian oil group, which in return received a $10-billion loan from China Development Bank. Beijing has also made a $10 billion loan to Kazakhstan to be paid off in crude pumped into a new pipeline built by the Chinese to the Sinkiang border Ñ but still a long way from the markets on ChinaÕs industrial coast. Sinopec has said it wants to do large deals in Africa and South America in the coming months, and that it hopes to give its listed investment vehicle greater flexibility to make overseas purchases.
The swaps may not be such a good deal for Beijing. The loans will be repaid at current prices. And since the prices are generally predicated on the spot market, now down, they are subject to unpredictable spikes in the future on delivery.
But the Chinese are also using a second strategy Ñ if you can't fight them, join them. PetroChina is talking with French Total about an exploration venture in Venezuela. Shell said it had been talking with PetroChina and Sinopec, ChinaÕs two largest oil companies, about bidding together to develop oil fields in Iraq.
One reason is that the Chinese companies are also looking for the technology they donÕt have, which makes their investments in exploration for new oil Ñ especially in difficult offshore environments Ñ less than it looks. For example, Teheran and Beijing keep making deals that never materialize because they need a high-tech Western multinational partner. Total recently, under pressure from Washington through the Sarkozy government, pulled out of a joint venture in Iran where it would have been the technology partner.
ThatÕs why Chinese companies are increasingly likely to make straight bids for small and mid-sized companies, especially those with attractive technology. For example, PetroChina said recently it would pay up to $1.4 billion for a stake in an oil group in neighboring Kazakhstan.
LouÕs sarcasm was blunt: "I have to thank these European officials. They saved me a lot of money. Now they come to me without conditions and I am beginning to consider making investments in Europe again."
What Lou didnÕt say was that the Chinese, to some degree, have closed the barn after the horse was stolen. The fact is, that CIC and other Chinese government investors turned cautious after they lost their shirts in several earlier plunges into foreign markets. Lou did not mention CIC's heavy paper losses through American investments in Blackstone, the private equity group, and Morgan Stanley on the eve of the crisis, as well as an earlier Lehman Brothers debacle.
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