Plummeting global equity markets have left cash-rich Chinese state-owned enterprises (SOE) poised and ready for a foreign resource shopping spree.
In recent history, China has been a recipient, not a provider, of Foreign Direct Investment (FDI). Chinese outgoing FDI outside the financial sector amounted to a mere $700 million in 2001. As of last year, the figure had risen to $40.5 billion.
According to a recent Standard Charter Bank report, 2009 could mark the first year that outward FDI exceeds investment flows coming into China. This reversal in the direction of FDI has been made possible by a stronger Yuan, an abundance of liquidity, and cheaper global commodity prices. Chinese SOEs are investing heavily in foreign resources, such as petroleum, base metals, and wood as a way to achieve vertical integration, thereby securing price stability in their manufacturing supply chain. Accordingly, on the international level, China’s FDI is chiefly aimed at resource-rich areas such as Canada, Australia, and Africa. The United States has seemingly been overlooked as a destination for Chinese FDI. This is perhaps part of the fallout from the China Offshore Oil Corp’s unsuccessful bid for Unocal in 2005.
Investment opportunities stemming from global economic meltdown are not lost on the Chinese government, who are keen to continue their ‘Going Out’ policy of encouraging Chinese companies to invest overseas. As a part of this push, outgoing investment regulations are in the process of being streamlined. For example, starting May 1st, Chinese SOEs will only need approval from local authorities, rather than the central government, for certain types of overseas investments.
One of the major items on the shopping list is Australian mining giant Rio Tinto, the target of a $19.5 billion investment by China Aluminum (Chinalco). This deal comes on the heels of two earlier Chinese investments in Australian natural resources: The China Minmetals Group $1.7 billion takeover bid for Oz Minerals Ltd. and the Hunan Valin Iron & Steel group’s $770 million investment in Australia’s third-largest iron ore exporter, Fortescue Metals group Ltd. Currently, Australia’s Foreign Investment Review Board is conducting probes into all three investments.
The Rio Tinto deal has stirred up passionate nationalist responses from some Australians, who view it as selling off Australia’s mineral wealth to foreign interests. Public perception of the deal further soured on news of the Chinese government’s rejection of a $2.4 billion Coca Cola bid to purchase the Chinese Huiyuan Juice Group, a popular Chinese brand. Although the Chinese government maintains that the proposed takeover would break Chinese monopoly laws, it’s possible that the deal was axed because officials in Beijing were wary of their own nationalist backlash should a successful Chinese brand end up in foreign hands.
Though substantial, recent SOE investments are not restricted to Australia. Various rumors are swirling around Sinopec, whom are thought to be negotiating a purchase of a 20% stake in the Spanish oil and gas company Repsol YPF. Both Sinopec and the China National Petroleum Corp (CNPC) have submitted bids to develop the Carabobo oil blocks in Venezuela. Because many companies are finding it difficult to secure financing given the meteoric fall in oil prices, cash resources will play a big part in any successful Carabobo bid.
Given the state of the global economy, China’s foreign resource buying binge will inevitably invoke nationalist responses. What is hitherto unknown is whether these responses will trigger a cycle of protectionism on both sides, thus prolonging the global economic downturn.
Zachary Fillingham is a contributor to Geopoliticalmonitor.com