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UPDATED: October 17, 2011 NO. 42 OCTOBER 20, 2011
Eyeing the Horizon
Chinese companies roll up their sleeves to invest overseas

GLOBAL FOOTPRINT: Local employees of a plant of the Chinese appliance maker Haier in Jordan assemble electronic components and parts. Haier has become one of China's few globally recognized brands (XINHUA)

China will probably continue its performance in outbound M&As, taking advantage of the global financial downturn, said Brian Gu, head of JPMorgan's China M&A unit.

Recent stumbles by Chinese firms seeking to acquire all or part of foreign companies, such as Huawei's attempt to acquire the U.S. server technology firm 3Leaf, shouldn't cast a shadow on future outbound Chinese deals, Gu said.

In February 2011, the Chinese telecom equipment maker withdrew from its proposal to buy specific patents of 3Leaf as the Committee on Foreign Investment in the United States suggested the Chinese company voluntarily divest the assets.

Those deals had aspects unique to them that shouldn't bode ill for Chinese acquisitions in general, he added.

"Political sensitivities will always be there," he said. "Chinese players are going to be more capable of approaching these sensitive issues. But I don't think these noises will go away."

Smoothing the way

The time is right for Chinese investors to extend their global reach. Many financially strained Western businesses may welcome an infusion of Chinese capital. Moreover, domestic market saturation and rising costs are also adding to the forces pushing Chinese capital offshore.

Going global will also help diversify risks looming over China's piling foreign exchange reserves. China has the world's biggest stockpile of forex reserves, totaling $3.1 trillion, mostly parked in low-yielding U.S. Treasury securities.

Meanwhile, policymakers have realized that spreading their businesses abroad is a more promising strategy than staying within the domestic market. The MOFCOM has loosened controls on overseas investments and simplified approval procedures.

"The government will make better use of the forex reserves to support companies going global," said Chen Deming, Minister of Commerce. "Vigorous efforts will also be made to strengthen services for private and smaller businesses, and safeguard their interests abroad."

"Some developed nations have tried to block Chinese investment citing national security," said Chen. "This does not help efforts to combat the global financial crisis."

In January 2011, the country launched a pilot scheme, allowing Chinese enterprises to use the yuan in outbound investments. Prior to this, Chinese firms had to exchange the yuan for U.S. dollars before investing overseas. But as a trial program, only non-financial companies registered in regions approved under the renminbi cross-border trade settlement scheme are eligible.

The program may be small in scale in its early stages, and surely it will become a shot in the arm for the globalization of corporate China, said the HSBC, in a recent report.

Montgomery Ho, head of commercial banking at HSBC China, said the program makes it easier for Chinese companies to invest abroad and help them avoid currency risks.

"We expect China's ODI to double in three to five years as China is rising as a main exporter of capital," said Noel Quinn, HSBC's Asia-Pacific regional head of commercial banking.

Chinese companies are seeking to secure natural resources on cross-border M&As, but there are also signs they are moving up the product chain in pursuit of technology, distribution networks and market expertise, he said.

Bumpy road

While the stream of Chinese investment grows, success is far from certain.

The China Council for the Promotion of International Trade in April 2011 conducted a survey over 1,024 member companies, and 60 percent of the respondents said the biggest obstacles were financing difficulties and a lack of cross-border operation and management talents. Other negative factors included local consumers' concerns about the quality of Chinese products and difficulty in finding qualified local partners.

Besides, 44 percent of the surveyed companies made overseas investments with their own capital, and 27 percent used bank loans while 14 percent financed their global expansion by issuing stocks or bonds.

As China twists harder on credit screws to tame inflation, domestic monetary environment becomes increasingly tightened. "The financing bottleneck has cast an ominous shadow over the prospect of many Chinese companies going out," said Hou Yunchun, Deputy Director of the Development Research Center of the State Council.

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