Uconn China Study Presentation on Chinese Outbound Investment


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Provides an historical overview of Chinese outbound investment; the role of the Chinese government; key drivers of outbound investment; constraints on outbound investments; and outbound activities in 2010.

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Uconn China Study Presentation on Chinese Outbound Investment

  1. 1. August 27, 2010<br />Presentation to UConn China Study Group<br />on<br />Chinese Outbound Investment<br />Kevin D. Cramer<br />
  2. 2. AGENDA<br />2<br />Historical Overview of Chinese Outbound Investment<br />Role of Chinese Government<br />Key Drivers of Outbound Investment<br />Constraints on Chinese Outbound Investments<br />Outbound Activities in 2010<br />
  3. 3. HISTORICAL OVERVIEW OF CHINESE OUTBOUND INVESTMENT<br /><ul><li>Chinese Government Initiates “Go-Out” Policy in 2002
  4. 4. Goal: Create 30-50 “National Champions” from most promising or strategic State-Owned Enterprises by 2010
  5. 5. Companies benefitted from Information Sharing Networks; Domestic Tax Breaks; Inexpensive Land; and Low-Interest Funding From State-Owned Banks
  6. 6. Between 2004 and 2009, 81% of Chinese outbound M&A transactions worth more than $50 million were done by SOEs.</li></ul>3<br />
  7. 7. HISTORICAL OVERVIEW OF CHINESE OUTBOUND INVESTMENT (cont’d)<br /><ul><li>Between 2000 and 2004, outbound Foreign Direct Investment (“FDI”) increased 70%. OECD figures indicate average annual growth rate of Chinese outbound investments between 2000 and 2006 was 116%
  8. 8. FDI outflows totalled US$5.5 Billion in 2004; by 2008 FDI soared to $52 Billion annually.</li></ul>4<br />
  9. 9. 5<br />HISTORICAL OVERVIEW OF CHINESE OUTBOUND INVESTMENT (cont’d)<br />Figures are in billions of dollars;<br />
  10. 10. HISTORICAL OVERVIEW OF CHINESE OUTBOUND INVESTMENT (cont’d)(Transactions over $100 million from 2005 to 2009)<br /><ul><li>Energy and Power : $72.2 Billion
  11. 11. Finance and Real Estate: $33.4 Billion
  12. 12. Metals: $62.5 Billion
  13. 13. Transport: $3.2 Billion
  14. 14. Other: $2.9 Billion</li></ul>6<br />
  15. 15. ROLE OF CHINESE GOVERNMENT<br />PRC Ministry of Commerce (“MOFCOM”) is principal regulatory body overseeing outbound investment<br />Coordinates activities of commerical counsellors in China’s embassies<br />March 2009 – Issued “Measures for the Administration of Outbound Investment”, effective May 2009<br />Intended to streamline approval process and delegate significant authority to local government offices<br />As practical matter, Beijing retains right to review and preapprove large or sensitive investment projects <br /><ul><li>Outbound investments of $100 million or more
  16. 16. Investments where applicant establishes a Special Purpose Vehicle outside of China</li></ul>7<br />
  17. 17. Role of Chinese Government (cont’d)<br />China Investment Corporation – a wholly state-owned company created in 2007<br />Created to diversify China’s foreign exchange holdings and improve risk-adjusted returns<br />Initially capitalized with $200 Billion in reserves purchased from People’s Bank of China in exchange for RMB 1,550 Billion bonds issued by PRC’s Ministry of Finance; slightly over 50% of capital allocated to global investment<br />As of December 31, 2009 CIC had an invested global portfolio of approximately $81.1 Billion<br />8<br />
  18. 18. Role of Chinese Government (cont’d)<br />CIC’s Four Basic Investment Principles<br />Invest on a commerical basis to obtain long-term, sustainable and risk-adjusted returns<br />Be a financial investor; Do not seek control<br />Be a responsible investor; abide by local laws and regulations; Exercise its corporate social responsibility consciously<br />Investments are research-driven to provide sound, prudent investment decisions and allocation-driven to assure disciplined approach to Investing.<br />9<br />
  19. 19. Role of Chinese Government (cont’d)<br />CIC’s Special Investments Department<br />Makes and manages, on an in-house basis, direct large-scale investments with concentrated positions over longer time horizons<br /><ul><li>CIC’s Expanding Professional Staff</li></ul>Approximately 250 people<br />80% with advance degrees<br />Over 50% have international work or educational experience<br />10<br />
  20. 20. Role of Chinese Government (cont’d)<br />National Social Security Fund – Established in 2000 to manage and operate the National Social Security Fund, a strategic reserve fund of the PRC designed to support social security expenditures and other social security needs<br /><ul><li>Overseas Investments include Foreign Corporate Bonds, Stock, Derivatives and Private Equity Funds
  21. 21. As of December 31, 2009, total assets were RMB 776.5 Billion ($113.7 Billion), with Global Stocks representing 6.54% of its assets
  22. 22. Fund’s Chairman Dai Xianglong recently publicly stated that the Fund will be investing more in U.S. and European markets as part of a plan to triple funds devoted to International Investments</li></ul>11<br />
  23. 23. KEY DRIVERS OF CHINESE OUTBOUND INVESTMENTS<br />Expand Market For Existing Products and Services<br />Capture Larger Portion of Value Chain to Increase Profit Margins<br /><ul><li>Access New Knowledge and Capabilities</li></ul>Raise International Profile by Acquiring Brand Names<br />Lenovo’s Acquisition of IBM’s Personal Computer Division for <br /> $1.75 Billion (2005)<br />Zhejiang Geely Holding Group’s Acquisition of Volvo from Ford for<br /> $1.8 Billion (August 2010)<br />Secure Energy and other Natural Resources<br />Increase China’s Influence and Political Capital<br />12<br />
  24. 24. CONSTRAINTS ON CHINESE OUTBOUND INVESTMENTS<br /><ul><li>Lack of Managerial Expertise and Experience
  25. 25. Economist Intelligence Unit 2010 report states that in survey of 110 Chinese executives, 82% identified lack of management expertise in handling outbound investment as biggest challenge
  26. 26. Corporate Governance Framework Underdeveloped
  27. 27. State Influence May Result in Pursuit of Goals Other Than Profit Maximization
  28. 28. Adverse Publicity Arising From Willingness to Invest in Politically Sensitive Countries
  29. 29. Democratic Republic of Congo
  30. 30. Sudan</li></ul>13<br />
  31. 31. CONSTRAINTS ON CHINESE OUTBOUND INVESTMENTS (cont’d)<br />Regulatory Hurdles to Foreign Investment in Key Countries<br /><ul><li>United States
  32. 32. National Security
  33. 33. Political Environment</li></ul>14<br />
  34. 34. CONSTRAINTS ON CHINESE OUTBOUND INVESTMENTS (cont’d)<br /><ul><li>Foreign Investment and National Security Act and U.S. Department of Treasury Regulations govern process by which the Committee on Foreign Investment in the United States (“CFIUS”) review investment by foreign persons in U.S. Companies
  35. 35. U.S. law permits President of United States to suspend or prohibit certain transactions based on credible evidence that a foreign person exercising control over a U.S. business might take actions to impair U.S. national security
  36. 36. No authoritative list of sectors that would trigger CFIUS review</li></ul>15<br />
  37. 37. CONSTRAINTS ON CHINESE OUTBOUND INVESTMENTS (cont’d)<br /><ul><li>CFIUS has shown a keen interest in transactions involving (a) Foreign Government-Controlled Entities and (b) investments in Resource-Based Assets. </li></ul>Other sensitive sectors include:<br /><ul><li>Aerospace;
  38. 38. Encryption;
  39. 39. Telecommunications; and
  40. 40. Critical Infrastructure (e.g., Ports).</li></ul>16<br />
  41. 41. CONSTRAINTS ON CHINESE OUTBOUND INVESTMENTS (cont’d)<br />Notable Failed U.S. Transactions<br />China National Offshore Oil Company (“CNOOC”) $18.5 Billion Bid for Unocal (2005)<br /><ul><li> Concern that PRC Government was seeking control of critical oil & gas supplies
  42. 42. Use of preferential loans from state-owned banks and CNOOC’s state- owned parent put U.S. bidders at competitive disadvantage
  43. 43. Transfer of sensitive technologies</li></ul>17<br />
  44. 44. CONSTRAINTS ON CHINESE OUTBOUND INVESTMENTS (cont’d)<br /><ul><li> Lack of reciprocity by PRC
  45. 45. Various action by U.S. Congress, including passage of legislation prohibiting CFIUS from completing review of transaction for 141 days -- 51 days longer than maximum of 90 days established by Exon-Florio Amendment</li></ul>18<br />
  46. 46. CONSTRAINTS ON CHINESE OUTBOUND INVESTMENTS (cont’d)<br />Huawei Technologies proposed joint bid with Bain Capital Partners to acquire telecommunications firm 3Com for $2.2 billion (2007/2008)<br /><ul><li> Extensive Congressional Opposition</li></ul> Huawei’s alleged ties to People’s Liberation Army<br /> Increased vulnerability of U.S. computer networks and telecommunications systems to Chinese intrusion<br />Danger to National Security<br />Theft of Business Intelligence/Confidential Information<br />19<br />
  47. 47. CONSTRAINTS ON CHINESE OUTBOUND INVESTMENTS (cont’d)<br /><ul><li> Australia
  48. 48. Foreign Investment Review Board (“FIRB”)
  49. 49. Any foreign investor acquiring more than 14.9% of an Australian company must obtain clearance from FIRB
  50. 50. Initial 30-Day Review Period; can be extended for 90 days
  51. 51. Australian Treasurer has ultimate decision making authority</li></ul>Notable Failed Australian Transactions<br /><ul><li>Aluminum Corporation of China (“Chinalco”) Failed Bid to Invest $19.5 Billion in Rio Tinto (June 2009)
  52. 52. $12.3 billion for stakes in Rio Tinto’s iron ore, copper and aluminum assets; $7.2 Billion for Convertible Notes that could have resulted in Chinalco owning 18% of Rio Tinto (Chinalco already owned 12% of Rio Tinto at time of bid)
  53. 53. Chinalco sought 2 of 17 Board Seats
  54. 54. Concern that Chinalco would have far too much control over future production of iron ore and other Australian commodities </li></ul>20<br />
  55. 55. Constraints on Chinese Outbound Investments (cont’d)<br /><ul><li>China Nonferrous Metal Mining Group’s Failed Bid for Lynas Corp. (September 2009)</li></ul>CNMC terminated its $500 million equity investment in Lynas, a rare earth minerals company, after FIRB conditioned its approval on reducing stake in Lynas to less than 50% and cutting CNMC’s Board representation to less than half of Lynas’ Board.<br />Note: CNMC controlled 95% of global production of rare earth minerals and this deal would have given the SOE a majority stake in biggest new rare earth mine then under development<br />21<br />
  56. 56. CONSTRAINTS ON CHINESE OUTBOUND INVESTMENTS (cont’d)<br /><ul><li> Canada
  57. 57. Investment Canada Act
  58. 58. Acquisition generally of one-third or more of voting shares of Canadian Business by Non-Canadian triggers review; Direct investment reviewable if book value of assets of Canadian business exceeds $299 million as of end of most recent fiscal year
  59. 59. Parties cannot close transaction until approval granted by Minister of Industry (or Minister of Canadian Heritage where business is engaged in a cultural business)
  60. 60. Review period: Up to 45 days; additional 30 days possible or longer</li></ul>22<br />
  61. 61. CONSTRAINTS ON CHINESE OUTBOUND INVESTMENTS (cont’d)<br />Standard of Review: “Net Benefit to Canada”<br />Effect on economic activity in Canada<br />Effect on productivity, technological developments and products to Canada<br />Participation of Canadians in Canadian business<br />Effect on Competition in Canada<br />Compatibility with national industrial, economic and cultural policies<br />Contribution to Canada’s ability to compete globally<br /><ul><li>SOE – Minister must also consider:</li></ul>Nature and extent of control by foreign government<br />SOE’s corporate governance, operating and reporting practices<br />Ability of acquired Canadian business to operate on a commercial basis<br />23<br />
  62. 62. CONSTRAINTS ON CHINESE OUTBOUND INVESTMENTS (cont’d)<br />National Security Review<br />Injurious to “National Security”<br />National Security not defined in Investment Canada Act or regulations<br />Full National Security review can take up to 130 days<br />Notable Failed Canadian Transaction<br /><ul><li>China Minmetals Failed Bid to Take Over Noranda (2004/2005)</li></ul>China Minmetals – a SOE – sought to acquire one of Canada’s largest mining and metallurgy companies for $4.7 Billion<br /><ul><li>Concern over “Hollowing Out” of Canada to Foreigners
  63. 63. China as Colonizer and Canada as Colony argument by Canadian Auto Workers</li></ul>24<br />
  64. 64. OUTBOUND ACTIVITIES IN 2010<br /><ul><li>MOFCOM reported China’s outbound investments in first half of 2010 rose 24% over first half of 2009 to $55.18 billion
  65. 65. PriceWaterhouseCoopers issued report that outbound M&A activity rose 50% in first six months of 2010 compared to first six months of 2009, with 99 deals announced
  66. 66. Overall value of M&A deals was $23.1 billion, with 7 deals each exceeding $1 Billion</li></ul>Sinopec’s $4.6 Billion acquisition of 9.03% interest in Syncrude, Canada’s largest oil sands project, from ConocoPhillips<br />China Investment Corporation’s $1.2 Billion investment in PennWest Energy Trust (oil & gas; oil sands project)<br />25<br />
  67. 67. OUTBOUND ACTIVITIES IN 2010 (cont’d)<br />Resources sector continues to attract majority of transactions (14 deals), but increasing number of deals in High Tech; Manufacturing; and Service Industries<br />Key Markets include:<br />Australia<br />United States<br />Canada<br />Africa<br />26<br />
  68. 68. OUTBOUND ACTIVITIES IN 2010 (cont’d)<br />“The appetite for Chinese enterprises to invest overseas is showing no signs of slowing, and with Chinese enterprises’ increasing interest in global markets, technical capability, production and service expertise, as well as stable financial returns in mature asset markets, we can look forward to the announcement of many more outbound transactions”.<br />27<br />PricewaterhouseCoopers <br />August 16, 2010 News Release “China Outbound M&A deal activity up by more than 50%”<br />
  69. 69. Thank You<br />28<br />