Ten Feet Tall?

When a major Chinese SOE bids for or completes an acquisition involving natural resources outside of China we hear a lot about the unfairness of such deals (the big SOEs have unlimited access to cheap credit from the Chinese government!) and the threat these crafty Chinese pose in buying up resources around the globe.

But then we get something like the recent collapse of the Rio Tinto – Chinalco deal (WSJ article on this here (subscription required, but lots of articles on the web on this): http://online.wsj.com/article/SB124416345648587527.html#mod=rss_asia_whats_news)

What to make of it?  As the WSJ put it:

“The collapse Thursday of Aluminum Corp. of China’s $19.5 billion effort to boost its stake in Anglo-Australian mining-giant Rio Tinto shows that cash-starved producers of everything from oil to metals have more alternatives than they had just a few months ago.

Back then, China looked like one of the few ready sources of funds. But a rally in commodity prices in recent weeks — oil Friday traded as high as $70.32 a barrel for the first time this year — has drawn new investment opportunities, and funding is becoming easier to find as the credit crisis eases.

Both factors doomed the bid by the state-owned Chinese company, known as Chinalco. While deal watchers don’t predict an end to China resource deals, they see a more competitive landscape and expect smaller moves.

“Chinalco saw an opportunity and, unfortunately, the market turned against them before they could execute,” says Antony Dapiran, a partner in the Shanghai office of law firm Freshfields, Bruckhaus Deringer LLP.”

Wait a minute.  If this deal was part of the central government’s plot to buy up the world’s resources (using their huge foreign exchange holdings), why didn’t Chinalco just up its price and pay whatever it took?  And for that matter, if the masterminds in Beijing are so smart, why didn’t they move more quickly to nail down this deal before the market turned?

I have long believed:

1)    The acquisition of natural resources by Chinese SOEs abroad is consistent with the policies of the Chinese government, which is risk averse and believes (mistakenly) that owning the resources gives them greater security of supply

2)    However, the individual deals are not directed by the Chinese government and the Chinese government is not writing unlimited blank checks for the SOEs on these deals

3)    The Chinese SOE managers are smart and sophisticated, but no smarter or more sophisticated than their counterparts at the global companies with which they are dealing; they will win some and lose some

4)    To the extent that Chinese bureaucrats are involved in the process this is a net negative for the Chinese SOEs because these officials, like government officials everywhere, are not as sophisticated or knowledgeable about global markets as their private sector counterparts.

So I say, let’s write about the big successful acquisitions, but keep episodes like this in mind as we think about how quick, smart, tough, relentless, and well funded China’s SOEs are.

Explore posts in the same categories: China, Economy, Investment

One Comment on “Ten Feet Tall?”

  1. Erin Says:

    Interesting side fact about the Chinalco/Rio deal: It was submitted it for CFIUS review because Rio owns part of a copper mine in Utah. And CFIUS approved it.

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