Resource deals dominated China’s outbound investment of $21.4 billion in the first three months of 2012, with assets in South America the most sought after by mainly State-backed buyers, a study shows.A $4.8-billion deal struck in March by state-controlled Sinopec, China’s second-largest oil-and-gas producer, for 30% of Petrogal Brazil was the quarter’s single gest deal and one underlining an emerging trend of China purchasing minority stakes.
“Minority deals represent a clear majority (78%) of total deal value,” said a statement from A Capital, a private equity fund specialising in Chinese outbound investments and compiler of a quarterly index tracking Chinese outbound direct investments (ODI). “Going for a minority stake is increasingly recognised as a way to tap into high-quality assets that would otherwise not be for sale or out of reach for Chinese investors,” the statement said.
That approach has been followed since 2009 when Australia outlined its preferences for foreign investment in firms, pointing to the types of deals which would and would not succeed after a flurry of failed Chinese bids for resource assets.A key objection to Chinese asset purchases by many overseas governments and regulators is the state’s heavy involvement in transactions.
A Capital’s estimate of first-quarter ODI of $21.4 billion compared with Chinese data that showed outbound foreign direct investment at $16.55 billion.State-owned enterprises generated 98 percent of all deal value in the first quarter, the study showed.
The role of private firms shrank in the first quarter to 42% of deal volume from 47% a year earlier. They generated just 2% of the value of first-quarter ODI, mainly through smaller transactions.Most money -- 92% -- went into resource and energy deals and South America was the favoured destination for ODI, receiving 43%, the study showed.
BEHIND TARGET
The current run rate for transactions leaves China well behind a government target to spend $560 billion on overseas investments by the end of 2015.Total deals in the first quarter lifted the A Capital Dragon Index, which measures outbound investment growth, 2% versus the full year of 2011 to a level of 2 056 points. It remains beneath 2010’s record high of 2,069. The index dropped in 2011 for the first time since 2003, falling 2.6% to 2,015 points.
ODI is now at an historic high of 74% of the value of foreign direct investment into China, A Capital says. That compares with 20% in 2005 and the government’s target to reach 100% by 2015.Ministry of Commerce data shows that China attracted almost twice as much inward investment as the $60.1 billion it managed to send outbound in 2011. Roughly half of China’s attempted foreign forays ended in failure last year.
A Capital believes deal flow has been driven by the likely bottoming of the global economic cycle in 2012 and China’s determination to move its economy up the value chain.
Europe was the most popular destination for Chinese ODI outside of the resource sector, taking 83% of the non-resource deals in the quarter, although it was flat in value terms year-on-year at just $1.7 billion.Brands, technologies and high-end manufacturing were cited as the main investment targets in Europe.
TINY AMOUNT
A separate study published by an economic research firm, the Rhodium Group, reckons China’s investments in Europe could surge to $250-$500 billion between 2010 and 2020 and that deal flow in 2011 tripled to almost $10 billion from 2010.That $10-billion number, however, is far in excess of official Commerce Ministry data that put total Chinese ODI into the European Union at $4.3 billion last year, a 94% increase over 2010.
Either way, it is a tiny amount compared to what Europe needs to plug the hole in its debt-riddled finances.The International Monetary Fund estimates that European banks must trim their balance sheets by about $2.6 trillion by the end of 2013 to stabilise capital and asset bases ravaged by a sovereign debt crisis now approaching its fourth year.It implies a huge funding gap for European companies and a major opportunity for cash-rich Chinese firms -- especially those backed by abundant state-backed capital.
Europe attracted 16% of China"s ODI in the first quarter, the A Capital survey says, far behind South America’s share, though ahead of 15% snagged by North America, 13% that went to Africa, Oceania’s 12% and the 1% that went to Beijing’s Asian neighbours.
(From a Reuters report.)