SINCE THE START of the year, the message has been filtering down to the heads of China’s leading state-owned enterprises from their political masters inside the State Council. Quietly at first, then with greater urgency, Beijing has been cajoling its leading corporate representatives to venture abroad in search of foreign markets, resources, brands and distribution channels.
If those often powerful but nonetheless timid SOE heads were at all unsure about their top priority, China’s central bank chief rammed home the point on September 9. Talking at a trade forum in the coastal city of Xiamen, Zhou Xiaochuan told the country’s leading commercial banks to get busy buying. "Financial institutions are playing an important role in supporting overseas investments but it is still not enough," he said, adding that the balance between inbound and outbound capital was "uneven" – to China’s disadvantage.
Clear as a bell
Experienced M&A bankers say that the message is loud and clear. "Before, these signals have been patchy, but this one is as clear as a bell," says a senior Hong Kong-based investment banker. "It’s coming right from the very top this time – that for policy reasons, Chinese [corporations] have to get more active."
Kalpana Desai, head of Asia Pacific mergers and acquisitions at Merrill Lynch, says she’s "more bullish about the China M&A market today" than at any point in the past 10 years. "There has been a fundamental sea change at the senior level in China about becoming more active in cross-border M&A," she says. "The realization is that it’s better to employ foreign exchange reserves to buy hard assets overseas rather than US Treasury notes."
There were several highly varied deals in the summer of 2007, boosting cross-border volumes. From January 1 to September 11 2007, China outbound M&A activity hit $23.1 billion, compared with $20.9 billion for the full year 2006, according to Dealogic. Total cross-border volume for that period was $46.6 billion, just $3 billion shy of the total for 2006.
Probably the stand-out deal was the July acquisition of a 2.64% stake in Barclays by mainland policy lender China Development Bank for $2.975 billion. CDB has secured the right to pay a further $8.854 billion for an additional 7.64% stake if Barclays succeeds in its bid for Dutch rival ABN Amro – making the deal, if completed, the largest ever cross-border M&A transaction in mainland history.
Stealth was the watchword of the Sino-British deal, which was pitched, signed and sealed in less than a fortnight – usually the amount of time it takes a Beijing regulator to tie his shoelaces. UK prime minister Gordon Brown pre-approved the deal – Chinese firms have been the target of protectionism before, and CDB governor Chen Yuan, who secured a seat on Barclays’ board, wanted confirmation that there would be no last-minute regulatory hiccups. That deal was a win-win for both sides – Barclays gained a huge shot of fresh capital and a highly respected new board member; CDB, which is restructuring furiously in order to transform itself into a more commercially oriented lender, gained a ringside seat from which to view the inner workings of a complex global bank.
Rival domestic financial institutions have also been busy. Industrial and Commercial Bank of China, the People’s Republic’s largest lender, also entered the market in August, ending months of speculation about a foreign acquisition with the $572 million purchase of 80% of Seng Heng Bank, the second-largest lender in the former Portuguese colony of Macau.
That makes ICBC the last of China’s big three listed lenders to strike out abroad. In August, China Construction Bank paid $1.25 billion to acquire its foreign strategic partner Bank of America’s Asian operations. Four months later, Bank of China bought outright Singapore Aircraft Leasing Enterprise (Sale), Asia’s leading aircraft leasing firm, for $3.43 billion. Zhu Min, BOC’s chief financial officer, told Euromoney that if the bank "see[s] the products out there, we will buy. China has zero operational leasing capability, but over the next three to four years China will buy 300 to 400 jets each year. China needs such a company but didn’t have the products, which is why we bought Sale."
Sale’s acquisition was a classic foreign foray for a leading Beijing institution. The Singapore company offered a highly efficient distribution channel, a well-regarded and profitable industry brand, and a repertoire of products that could be quickly adapted to China’s booming aviation market.
The deal flow hasn’t been all one way. On August 20, South Korea’s SK Telecom snapped up a 6.61% stake in mainland rival China Unicom for $994 million and, less than a fortnight later, Singapore Airlines bought a 24% stake in China Eastern Airlines for $918 million. And on September 10, Blackstone announced that it would buy a 20% stake in diversified chemicals maker China National Bluestar for $600 million. That deal was one of many that Blackstone hopes to cut in China – in May, the US buyout group sold a 10% pre-initial public offering stake to China’s powerful new $200 billion state-run investment body, China Investment Corporation, for $3 billion.
Beijing certainly isn’t short of cash to fund foreign acquisitions. In addition to the heft provided by CIC, which will work alongside leading mainland firms to buy stakes in foreign corporations, the country is wallowing in cash. Foreign reserves stood at nearly $1.4 trillion at the end of July 2007, and look set to top $2 trillion by around the middle of 2008. And after years of record profits, led by booming exports, China’s leading state-run corporations are hardly short of ready capital.
"The country’s biggest firms have a cashflow of literally trillions of yuan," says Ding Wei, the Beijing-based head of investment banking at China International Capital Corp (CICC), China’s leading investment bank. "There’s lots of pressure on companies internally to push abroad. We are involved heavily in many of these transactions."