China Becomes a Powerful Foreign Investor: a Danger?

China Becomes a Powerful Foreign Investor a Danger

This reversal of the tide, that illustrates a new international impact of the world’s second economy, does not come without risk, according to experts.

Gone is the time when China was first seen as a land of offshoring western companies: wage increase in the country made it less attractive for multinationals and spurred the investing vector in the opposite direction, increasing the overseas Chinese investments by 18% over the first ten months of 2014.

Gone are also the days when China, through purchases, thought mainly to secure its supply of minerals and hydrocarbons. Acquisitions of foreign business groups by Chinese companies are now are all over the place, from food to mechanical industry, with all kinds of technological investments in between.

In early 2013, Chinese oil giant CNOOC bought the Canadian energy company Nexen concluding each transaction for a record of $15.1 billion, the largest Chinese overseas acquisition so far.

However, this represents only a fraction of the $ 625 billion China invested outside of its territory this year.

A fundamental shift is mainly driven by the powerful Chinese state companies, which benefit from direct political support from Beijing and financing facilities offered by the large public banks.

Chinese investments abroad have increased by more than 30 in a decade, according to official statistics.

From passive to active

“It’s just a matter of time before China’s investments abroad exceed the investments it receives,” said recently Zhang Xiangchen, Assistant Minister of Commerce. “If it does not happen this year, it will, soon.”

The second world economy is now the third largest investor in the world after the US and Japan. The first two recipient countries of Chinese manna are the United States and Australia.

But this international expansion is not without risk, are experts, who point to the lack of experience of Chinese companies in certain markets as well as their decisions sometimes dictated by the interests of the central government rather than the sense of business.

Chinese automaker Shanghai Automotive Industry Corp (SAIC) has been a serious disappointment in taking control of the South Korean automaker Ssangyong Motor, the serious financial difficulties were accompanied by a long strike and, ultimately, bankruptcy. SAIC lost a billion yuan in the venture.

The insurance giant China Life, Ping An, on its part, experienced a huge setback during dismantling of the 2008 Belgian-Dutch insurance bank group Fortis, in which the company had invested 3.5 billion dollars.

Even in the mining sector, as China knows too well, surprises are often probable. Wang Jiahua, an official of the Chinese Mining Association, says that about 80% of Chinese investments in foreign mines have resulted in “failures”.

Another example of emblematic stinging defeat was provided by a giant hydroelectric dam project in Burma on the Irrawaddy River: the firm China Power Investment Corp lost at least $1.2 billion in the middle of Myitsone, whose electricity was destined for China, and that the Burmese government had decided to suspend in 2011.

The “first cause” of these problems is the lack of strategy and audits by the leaders of major Chinese groups, says Jingzhou Tao, a partner in the law firm Dechert LLP China.

“The signing of a merger and acquisition, the boss of a Chinese state-owned company, will be hailed as a great success,” he says. “Two years later, if the losses are piling up, this will not be a concern.”

At stock exchange, the country consistently proves to be a big player, notwithstanding its slower-than-expected economic growth. China’s decision to cut its key rate boosted North American stock markets on Friday. Shortly after opening, the S&P / TSX index of the Toronto Stock Exchange climbed to 80.22 points (0.53%) at 15 155.40 points. The index went past above the psychological barrier of 15,000 points on Thursday due to a rise in crude oil prices in New York and London.

Wall Street’s announcement of additional stimulus measures in China was also well received. The Dow advanced from 16,5.72 points (0.94%) to 17,884.72 points, the S&P 500 gained 17.81 points (0.87%) to 2,070.56 points and the Nasdaq was progressing 41.99 point (0.89%) to 4,743.86 points.

China’s central bank announced on Friday a decline in interest rates, a new measure for 2012 that should help reinvigorate the second global economy slowdown.

This decrease in benchmark rates on deposits and loans a year, respectively 0.25 and 0.40 percentage point, will be effective as of Saturday, announced the People’s Bank of China (PBOC, central bank) on its website.

This is the first decline in interest rates in China since June 2012. The decision was taken in response to slowing growth and deflationary risks, the extent of the annual deposit rate reduce will be 2.75% and compensation savings to 5.6%, according to the central bank.

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