2009 July 26 Sunday
China To Accelerate Overseas Acquisitions

The Financial Times reports that the Chinese government will encourage Chinese companies to do more overseas acquisitions.

Beijing will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, Wen Jiabao, the country’s premier, said in comments published on Tuesday.

“We should hasten the implementation of our ‘going out’ strategy and combine the utilisation of foreign exchange reserves with the ‘going out’ of our enterprises,” he told Chinese diplomats late on Monday.

The Chinese government has intentionally run a large trade surplus and built up a $2 trillion reserve in foreign holdings - much of it in US sovereign debt. So they have the cash needed to do the buying.

But other governments block some Chinese acquisitions for national security and commercial competitiveness reasons.

The U.S. effectively blocked a takeover of 3Com by Bain Capital and Huawei Technologies. Some of 3Com's assets were deemed "strategic," meaning China should never get its hands on technology that might be counter to American interests.

The most significant example of a fight between a sovereign government and China's M&A power was the death of a deal between Chinese mining company Chinalco and Rio Tinto (RTP). Chinalco planned to put almost $20 billion into the metals company.

As the biggest importer of almost all commodities (with the exception of oil where the US buys more) China has a vested interest in getting control of foreign mines and oil fields.

China has long been scouring the globe for energy and commodities to feed its thrumming economy. What is new is the leadership’s determination to increase outbound foreign direct investment, or O.F.D.I., as it weans the economy off low-value, export-oriented manufacturing. The deal by Sinopec, the largest Chinese oil refiner, to buy the Swiss oil explorer Addax for $7.24 billion last month was China’s largest overseas acquisition yet.

Letting the Chinese get control of more mineral resources is a bad idea. China already restricts export of a variety of minerals including rare ones not available elsewhere.

The complaint, filed with the World Trade Organization by the European Union as well as the U.S., accused China of restricting exports of various materials including zinc and coke, a key component for making steel, by establishing export quotas, duties and other restraints.

European industries have been complaining about these restrictions for years.

The European Commission said on June 23 that it has heard concerns for a number of years from European industries about Chinese export restrictions, namely quotas, export duties and minimum export prices, which China applies on key raw materials, such as yellow phosphorous, bauxite, coke, fluorspar, magnesium, manganese, silicon metal, silicon carbide and zinc – many of which cannot be sourced elsewhere.

Yet China is buying pieces and controlling interests in companies which operate mines that extract rare earth metals outside of China.

Copper is not the only metal China seeks to control and Teck is not the only acquisition China has made in the resource sector. In what could be a further indication of China’s tightening grip on the supply side, the China Non-Ferrous Metals Mining (Group) Co., Ltd. (CNMC) recently acquired controlling interest in the Australian rare earth project developer Lynas Corporation Ltd. (Lynas). The full transaction, comprising a combination of equity, debt and loan guarantees, is valued at US$366 million and provides a glimpse of what rare metal companies are really worth.

What is at stake? See this recent post from The Oil Drum on oil and minerals scarcity. Starting around slide 12 the presentation shifts toward mineral reserves and where minerals get produced. Does slide 18 really represent the future for minerals availability? Will other major reserves for rare earth minerals be found outside of China? Also see this post by André Diederen about minerals scarcity. China's export restrictions aside, if the situation with minerals reserves is really that dire we are in trouble.

Share |      By Randall Parker at 2009 July 26 03:21 PM  China


Comments
Hudson said at July 26, 2009 6:36 PM:

Well, they've already got control of Hongcouver and have got their little yellow fingers into the Canadian oil deposits. With the US in economic freefall and the PRC holding so much debt, I wonder how they'll get "paid back?" The US has lots of forests, minerals, coal and yes oil. Maybe that would pay the bill nicely. As for the usual idiots in the US trying to keep the PRC from getting US technology...too late! Plenty of Chinese "students" at our universities, and Bill Clinton made sure they got some goodies in return for campaign finance. PRC military intelligence regularly probes US gov't computers. Sometimes they get stopped. Sometimes they don't. Game Over, Man!

A.Prole said at July 27, 2009 12:35 AM:

The complaint by the EU against China is a compltete load of bollocks, as you wold expect from that shitty organisation.
Firstly, the idea of the EU importing coal from China (and incidently increasing the trade deficit), is ridiculous as a very big exporter of coal (ukraine) is on its doorstep, plus the fact that coal is being phased out due to carbon tax.
It's just a nasty, underhand way of lashing out at China, despite the fact that the moaners are the very people responsible for the current 'free trade' paradigm and thus the present economic set-up.

Randall Parker said at July 27, 2009 5:54 PM:

A.Prole,

Coal? Did the complaint even mention coal? I think the focus is on minerals.


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