Bungled deals destroy myth on acquisitions
Three news items involving mainland companies' overseas acquisition deals emerged last week and caught the eyes of many international investors.
On Tuesday, China Investment Corp (CIC), the mainland's US$200 billion sovereign fund, announced it would spend US$1.22 billion to increase its stake in Morgan Stanley, the US investment bank in which it had already suffered a huge paper loss with its initial investment. This was followed within a few hours by a more bizarre announcement by an obscure private company in Sichuan that it would buy the Hummer brand from General Motors. On Friday, the state-owned Aluminum Corp of China (Chinalco) announced that its US$19.5 billion tie-up with the Australian-British mining giant Rio Tinto had collapsed.
The three events may be separate, but together they signal a confusing and bumpy road ahead for the cash-rich mainland's overseas-acquisition drive. Simply put, the Chinese are buying stuff they should avoid while the things they should buy are slipping out of their grasp.
But one thing for sure is that these developments will help remove one prevailing myth among foreign investors and government officials that the central government, flush with nearly US$2 trillion in foreign-exchange reserves, is orchestrating a systematic and concerted effort to gobble up assets worldwide. That myth has raised the concerns of many governments and among investors about the mainland's rising global corporate ambitions. Well, there's no reason for them to worry.
Even if there were such an effort, the mainland leaders have really bungled the job. A likelier scenario is that the central government lacks a vision and a coherent strategy in its overseas-acquisition drive and may suffer more setbacks in the future or buy more stuff it should not buy.
CIC's continuous investment in Morgan Stanley is puzzling for its purpose and timing. CIC made its first investment with a US$5.6 billion stake in the investment bank in December 2007, at the very peak of the global asset bubble.
After the bubble burst, CIC suffered huge paper losses from its investments in Morgan Stanley and Blackstone, a private-equity group. After CIC was heavily criticised in the domestic media for the two disastrous investments, and with the value of the investments more than halved at the peak of the crisis last December, CIC chairman Lou Jiwei told investors in Hong Kong he did not 'have the courage' to invest in foreign financial institutions.