Wednesday, June 17, 2009

China's investment bids

It is well known that China has huge investible funds (foreign currency) on account of its humongous trade surplus. Traditionally these funds have been invested in US treasury bonds. In a bid to diversify investments and thereby reduce risk, China has been seeking to invest in foreign companies. China has also been trying to use this opportunity to get a stranglehold on commodities. Timing is perfect. Economic crisis has accentuated the capital needs of the corporate world. Stock market crisis has ensured that equity is going abegging. Why shouldn't China make hay while the sun shines?

However, China is only getting rebuffed in a few places. Sometime back its attempt to buy the American oil company Unocal through the Chinese state-owned oil company CNOOC was frustrated by political interests in the Mecca of Capitalism. China's largest aluminium company, Chinalco (state-owned, needless to say) proposed to buy $19.5 bn stake in Rio Tinto, Australia-based world's second largest mining company valued for its copper and iron-ore mines. Sinophobic Australia has negatived this Chinese bid.

In a way, world has turned a full circle. Xenophobic China has become friendlier but other parts of the world are fearful of China's investments. Prosperity brings its own problems. Prosperous China cannot afford to alienate the world however much rest of the world may try to shun China's overseas investments.
In the late 20th century, capitalism is said to have saved China. Now China is trying to rescue capitalism. Can it succeed?
Many companies in the metal sector all over the world are in the process of hedging their raw material requirements through acquisition of mines or stakes in mining companies. For example, Hindalco is purchasing a coal mine in Queensland, Australia at a cost of $80 mn. Such moves make strategic sense in view of cheap prices of mines now. China by virtue of its large forex resources is aiming at big bets. Resistance to big players is a part of international game. Repeated rebuffs will irritate China. China's response now or later will be unpredictable.

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