At $1.95 trillion, China’s international reserves are more than enough to fund America’s entire budget deficit next year, which the U.S. Treasury estimates will reach $1.3 trillion because of the government’s massive stimulus spending. There is no direct correlation between these two numbers, but they highlight a reversal of fortune. China now has the cash to cherry-pick the world’s best assets, while America has no choice but to pawn its future to finance today’s needs. As it is, China already owns $763.5 billion worth of U.S. Treasury bills, 24% of the total, and has become the Federal Government’s largest single creditor.
It’s all causing angst and hostility, and not only in the U.S., where congressmen shot down an $18 billion bid by Beijing-backed oil company CNOOC for Unocal in 2005. In Australia last month, aluminum maker Chinalco’s $19.5 billion purchase of miner Rio Tinto collapsed in part because of political opposition. In Germany last year, there were murmurings against China Development Bank’s $13.5 billion purchase of Dresdner Bank, which eventually faltered.
These high-profile failures notwithstanding, the Chinese are actually notching up notable success in overseas-asset purchases. Data compiled by the Heritage Foundation show a dramatic increase in the volume of the country’s completed megadeals, worth $100 million or more, over the past three-and-a-half years. From $8.7 billion in 2005, these large acquisitions rose to $20 billion in 2006, $36.2 billion in 2007 and $54 billion in 2008.
The shopping spree slowed somewhat in the first half of this year, but the Chinese still pulled off 15 large acquisitions valued at $23.7 billion, including seven in Australia and one in the U.S., in which China Investment Corporation , the sovereign wealth fund that manages $200 billion of China’s reserves, added $1.2 billion to an existing stake in Morgan Stanley.
Expect reinvigorated buying for the rest of the year, particularly smaller transactions and real estate purchases, because China’s bureaucracy is making it easier for the country’s citizens to acquire foreign assets. On May 1, Beijing transferred the review and approval of most Chinese acquisitions to various provincial commerce departments, leaving the Ministry of Commerce responsible only for transactions worth $100 million and more. And investors who want to buy foreign assets valued at less than $10 million need only to apply online, with little in the way of documentary requirements and action promised within three days.
The new rules may further boost investment in U.S. property. According to the U.S. National Association of Realtors, mainland Chinese were the fourth-largest group of foreign buyers in the 12 months to May 2008, picking up posh homes mainly in California and Florida at a median price of $450,000, the highest paid by foreign purchasers. Chinese purchasers were more likely to buy a property for more than $1 million than those from other countries, except for the British.
There are many reasons for the Chinese government’s push for cross-border acquisitions, not least the need to recycle out of China the growing mound of international reserves to prevent overheating of the economy. Beijing is also getting antsy about keeping the bulk of its money in U.S. Treasuries because of the uncertain prospects of the dollar and the U.S. economy. And the relatively resource-poor country needs a steady supply of oil, metals and other raw materials, which is why 60% of the megadeals since 2005 involved energy and metals, mainly in Australia but also in Africa, South America and the Middle East.
China is likely to remain focused on resources, especially since the return on its investments in finance and banking, which accounted for 15% of all outbound investments from 2005 to June 2009, has been less than stellar. Starting in 2007, CIC bought stakes in investment bank Morgan Stanley, in private equity firms Blackstone and JC Flowers and in credit-card company Visa. Those shares have lost much of their value, although they are making a comeback with the recent improvement in the stock market.
CIC is said to have sworn off financial assets and looking instead at real-economy sectors such as commodities and real estate. That’s in line with comments by Li Lianzhong, head of the Economy Bureau of the Communist Party of China’s Policy Research Center, who told an investment forum in June that buying gold and U.S. property are better options for China compared with investing in U.S. Treasuries.
It may only be a matter of time before the Chinese start making bids for iconic landmarks. Like the Japanese before them, who in the late 1980s snatched like the Rockefeller Center and the Pebble Beach golf course, they may succeed in buying some of the world’s best properties. The question is whether they can maximize value and get the best returns out of them.
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