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How far will China's expansion bids go?

(Xinhua)
Updated: 2009-06-17 16:35

Yao said Chinalco's failed attempt was due to its management's insufficient understanding of the concerns of big Western resource companies, their governments, public and shareholders with China's entering into the foreign resource sector, and of the possibility of a stock price resurgence and its consequences.

"Chinalco should have pressed its negotiating advantage harder and not given Rio time to seek alternatives. Besides, a 1-percent break fee for a $19.5 billion deal makes breach of contract too easy," he said.

Yao's opinion was shared by his colleague, Dr. Dylan Sutherland, a scholar in Contemporary Chinese Studies at the University of Nottingham.

"The complicated deal Chinalco proposed created a long gestation period and opened up possibilities for market corrections and greater political scrutiny," Sutherland said.

"The major lesson is to keep trying. The markets moved against Chinalco. It may have opted for a simpler equity deal and acted faster, but it is not clear then this would have given it exactly what it wanted."

In the deal between China's Minmetals and Australia's OZ minerals, Minmetals' last-minute decision to sweeten its offer with an extra $180 million proved decisive in winning over OZ Minerals shareholders. The improved offer helped Minmetals see off two rival bids for the miner.

Minmetals won Australian government approval in April to take over OZ Minerals with a revised offer after the previous bid was rejected on national security grounds. The new offer excluded one of OZ's flagship mines located near a military range.

"There will always be political pressures on big business investing overseas," Sutherland said. "Chinese enterprises may have to accept, being Chinese state-run companies, that any offer they make will need to be very, very attractive."

"China Inc" risk?

Sutherland said one of the main risks to these state companies is that they are perceived as being vehicles for "China Inc."

"How to break these perceptions? There is simply no easy way to mitigate these risks, other than perhaps being more upfront about them," he said.

"Constantly refuting the links with the state and government does not necessarily help, in fact it only hinders the process, creating an impression of dishonesty in the eyes of many observers," he said.

The Chinese government started to encourage domestic enterprise to invest abroad in 2000. In 2008, direct outbound investment by Chinese enterprises reached $52.1 billion, up 96.7 percent year-on-year.

In April, China unveiled an investment guidebook to help domestic firms make foreign investment. In the following month, the State Administration of Foreign Exchange publicized a draft regulation aiming to simplify examination and approval procedures for domestic companies' investment abroad to solicit public opinion.

Economists agree that the Chinalco debacle illustrates how the financial crisis has severely affected Western trans-national corporations and their profits and many have large debts they cannot service.

"This is a window of opportunity for China's national champions. But China should realize that even with the support of the state banking sector, even with the damage the global financial crisis has inflicted on Western business, China cannot expect to implement its investment strategy unopposed," professor Yao said.

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