Baby steps

Despite the increasingly drastic nature of the global economic downturn, Chinese outward investment has continued to advance. Driven both by policy incentives and business strategy, a strong appetite remains for both passive and active investments.

For those with cash and capability, the collapse in world share prices offers attractive opportunities. Vice Minister of Commerce Fu Ziying told state media that the economic crisis offers Chinese firms "a great acquisition opportunity."

 By early December 2008, China had already logged 231 M&A deals totaling US$47.7 billion in rank value, a 50% increase in value from the same period in 2007. Average deal size nearly doubled to US$206 million, although this figure was distorted by one bumper deal: Aluminum Corp of China’s US$14.3 billion investment in mining giant Rio Tinto.

China has also made its share of portfolio investments. Insurance firm China Life and China Investment Corp (CIC), the country’s sovereign wealth fund, both bought into Visa’s initial public offering. CIC also raised its stake in private equity firm Blackstone from 9.9% to 12.5%.

However, there are signs that a change in quality and perhaps quantity is in the offing at CIC. For starters, the fund had a bad 2008. In addition to huge paper losses on its investments in Blackstone and Morgan Stanley, CIC discovered that its investment in the supposedly bomb-proof Reserve Primary Fund was exposed to the US subprime crisis after all.

Lou Jiwei, chairman and CEO of CIC, recently questioned the attractiveness of Western financial institutions.

"We have to wait for more certain policies," he said at a conference in Hong Kong in December. "If policy is changing every week, how can I feel confident?"

At the same time, he suggested that CIC will diversify its geographic exposure by increasing investments in emerging markets. Such statements by CIC may be part posturing, said Edwin Truman, senior fellow at the Peterson Institute for International Economics.

"Emerging countries are going through their own meltdown," he noted.

However, Truman believes that CIC’s decision-making structure will prevent it from being active while the turmoil persists. Chinese direct investment in financials in 2008 dropped steeply in both rank value and number of deals.

As far as China’s business investors are concerned, the present climate may discourage radical moves.

"With the external market environment being very volatile, Chinese companies looking to go global are taking a more cautious approach," said Zhao Jing, managing director and head of China investment banking for Citi. Zhao also noted that Chinese firms are starting to focus more on their domestic business and consolidating local market share. 

However, the Chinese automotive industry appears intrigued by the crisis in Detroit. Chang’an Auto is reported to be discussing taking Volvo off Ford’s hands. Dongfeng Motor is considering GM’s assets. However, Chery Automotive and Chrysler recently broke off partnership talks, and Chery later said it is not interested in foreign acquisitions at present.

Sectors to watch: Materials, energy, health care and high-tech.