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Whole world of bargains

CASHED-UP Chinese companies with visions of global expansion are hungry to gobble up overseas assets on the cheap during these times of economic stress, but some analysts warn that those who bite off more than they can chew face serious problems ahead.

Sichuan Tengzhong Heavy Industrial Machinery Co, an obscure, privately held company with scant auto industry experience, became the latest company at the table last week when it announced it would acquire the Hummer brand from ailing General Motors Corp. No price was disclosed.

The announcement followed news that China Investment Corp, which operates China's US$200-billion sovereign wealth fund, would spend US$1.2 billion to increase its holding in Morgan Stanley. At the same time, PetroChina Co said it would purchase a 45.5-percent stake in Singapore Petroleum Co for S$1.47 billion (US$1.02 billion).

Other potential deals in the pipeline include the Industrial and Commercial Bank of China taking a stake in Thailand's ACL Bank and China Investment Corp considering an investment in the City of London.

"It is not accidental that Chinese companies are gathering momentum in overseas expansion," said Sun Lijian, a finance professor at Fudan University. "It is a logical strategy for them to go abroad. The major question is one of timing."

Sun said the impetus for investment overseas comes from China's huge foreign exchange reserves and the need for Chinese companies to gain foreign footholds if they want to compete globally.

Foreign currencies

China's forex reserves stood at US$1.95 trillion at the end of last year, an increase of US$417.8 billion from a year earlier, making China the world's biggest holder of foreign currencies.

The Chinese zeal for carving footprints on foreign soil has shown no sign of abating during the worst economic meltdown since the Great Depression of the 1930s.

According to the Ministry of Commerce, China set up 445 companies overseas in the first quarter of this year, up 6.8 percent from a year earlier. Outbound direct investment reached US$55.6 billion last year, almost triple a year earlier. Overseas mergers and acquisitions by Chinese companies also increased, the ministry said.

"Accelerating overseas activity by Chinese companies may be a result of recovering confidence as the global economy shows signs of stabilizing," said Sun.

"It's a good time to do some bargain hunting, but companies still have to bear in mind a few basic principles," he said.

First, domestic companies should beware of putting all their eggs in one basket in deciding where and how to invest overseas, Sun said.

The United States and Europe were once the favored investment destinations, fueled by the savvy of financial institutions with an array of tools and products to woo Chinese clients. But that is changing. The global financial crisis has clearly shown that investments considered safe one day may be on the scrap heap the next. It's been a painful lesson for some.

Ma Mingzhe, chairman of Ping An Insurance Co of China Ltd, said recently that the country's second-largest insurer would focus on investing in domestic businesses for the next few years after Ping An got burned on its investment in the European bank Fortis NV.

Ping An's profit dived 99 percent last year from a year earlier due to losses on its stakes in Fortis, which ran into trouble with credit derivatives.

Secondly, Sun advised, companies should take a long-term view on investments and avoid impulse buying.

Tengzhong Heavy may be a case in point.

As soon as news broke that Tengzhong Heavy wanted to acquire Hummer, analysts were divided on the merits of the deal.

Some, assuming Tengzhong Heavy would get Hummer at a low price, said it was a bargain as Hummer would immediately catapult the Tengzhong name on to the global stage.

Other analysts weren't so sure that a company better known for cement mixers and bridge piers could make a profit with a gas-guzzling vehicle at a time when fuel conservation has come to dominate the auto industry.

"Hummer may cause indigestion for a company having barely any experience in producing passenger vehicles," said Sun.

Thirdly, Sun said, Chinese companies need to move up the value chain in making foreign investments so they can take advantage of foreign markets now eager for Chinese investment and willing to share core technologies.

Last month, a delegation from Washington State held a symposium in Shanghai to try to attract Chinese investment into its clean energy, life sciences and medical industries.

Getting less defensive

Mark Calhoon, managing director of the state's International Trade and Economic Development, had visited China many times before, but the latest visit was the first to be combined with a symposium.

"I can feel the time is ripe," Calhoon said. "It has nothing to do with the financial crisis. We come because China has demonstrated growing interest and capabilities in projects of high technology. We look for common growth."

Sun said there have been some subtle changes in foreign attitudes toward Chinese investment. Other countries are getting less defensive, he said, and that's a trend likely to become more prevalent.

Finally, Sun said China should invest its forex reserves through private companies rather than through the state sovereign fund or giant state-owned companies. "Private investment may encounter fewer barriers because there's less taint of politics," he said.


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