Next year will see cashed-up mainland companies and the new sovereign wealth fund scour the globe for investment opportunities. Banks and commodity companies are expected to lead the acquisition charge after Chinese overseas deals hit a record this year. The nation's three oil majors and the largest mining companies will be on the lookout for opportunities to feed surging demand for oil, coal and metals as the economy continues to grow at a double-digit rate. Banks and insurance companies, flush with cash from domestic initial public offerings, are also expected to continue to expand internationally despite misgivings by some that they should focus on their own growing domestic market. The mainland's new US$200 billion state investment firm, China Investment Corp, will also be shopping around for foreign targets in a variety of sectors. CIC announced on December 19 that it would invest US$5 billion in Morgan Stanley as the second-biggest United States securities firm struggles with losses related to the unfolding global subprime crisis. It was CIC's biggest acquisition to date. 'One reason that there have been a lot of headlines about funds in the east buying banks in the west is that they are being offered at fire-sale prices,' said Stephen Jen, the chief currency economist at Morgan Stanley. Mr Jen said the hunt for energy reserves to meet factory and infrastructure needs was at the foremost of the mainland's overseas strategy. 'At this particular juncture, the thinking is still that China needs a secure, steady supply of energy and that the best way to [achieve] that is not to leave it to the market and trust they can always have access, but to own part of the supply,' he said. China does have advantages that it can use in its favour with companies it seeks stakes in. 'Mainland companies can get assets at cheap valuations by playing the China card and granting access to the deep China market, helping to reduce the premium the companies would have to pay,' said Jing Ulrich, the chairman of China equities at JP Morgan. Sinosteel Corp, the mainland's second-largest iron-ore trader, is planning to pay US$1.1 billion for Australia's Midwest Corp. China Shenhua Energy, the nation's largest coal producer, is interested in Mongolian coal mines expected to sell for US$2 billion and is looking at Indonesian miner Adaro Indonesia, the second-largest coal-mining company in the Southeast Asian nation. Meanwhile, executives at the Industrial and Commercial Bank of China have said they are looking for acquisitions in Russia, Africa and Indonesia. Other lenders including Bank of China and China Construction Bank Corp have made similar noises about looking overseas. Deals of about US$500 million are expected in the consumer sector as Chinese companies look for distribution networks. Mainland companies have a lot of money to put to work. PetroChina, the largest oil company on the mainland, raised US$8.91 billion in the domestic market this year. Shenhua Energy raised US$8.9 billion and China Construction Bank, the mainland's second-largest bank, made US$7.72 billion. China Investment Corp, the sovereign wealth fund Beijing started this year to manage about US$200 billion of the country's foreign exchange reserves, will have about US$70 billion to invest overseas. The fund is expected to put money into a wide array of vehicles including real estate investment trusts, private equity and alternative investments. 'In part, the CIC is going to be judged on its returns, which makes things very difficult,' said Michael Pettis, a finance professor at Peking University's Guanghua School of Management. 'They are funding at around 4 to 5 per cent and when you add in expected yuan appreciation of maybe 7 to 10 per cent, that means they are going to achieve hedge-fund-type returns without hedge-fund-type risks. I don't see that as likely.' China Inc's acquisition activities overseas hit a record high this year and involved more high-profile names. ICBC, the largest bank on the mainland, in October paid US$5.4 billion for a 20 per cent stake in Standard Bank Group, the largest bank in Africa. It was the largest overseas investment ever by a mainland company. Citic Securities, the largest publicly traded brokerage on the mainland, and US investment bank Bear Stearns agreed in October to invest US$1 billion in each other and merge their Asian operations. China Minsheng Banking Corp, the mainland's only privately controlled lender, agreed in October to pay US$317 million to buy a 9.9 per cent stake in Nasdaq-listed UCBH Holdings, the holding firm for US-based United Commercial Bank. Minsheng has the right to further increase its stake in UCBH to 20 per cent. By December 10, the value of announced cross-border acquisitions by China had risen 96 per cent to US$26.5 billion, a new record according to Thomson Financial. Chinese deals are still small compared with this year's top five Asia-Pacific transactions, all of which topped US$10 billion, according to Thomson, although Hong Kong's Hutchison Whampoa did manage to cross that threshold when it completed the sale of its Indian telecommunications unit to Vodafone Group for US$12.7 billion in August. While the mainland is more active, some acquisitions this year have gone wildly wrong. China Development Bank paid Euro2.2 billion (HK$24.76 billion) for a 3.1 per cent stake in Barclays in July in a move to bolster its Euro9.8 billion bid for Dutch lender ABN Amro that ultimately failed. Barclays' shares have plunged 28.26 per cent since CDB bought the stake. CIC paid US$3 billion for an about 10 per cent stake in US private equity giant Blackstone Group in the run-up to its initial public offering in June. Its shares have fallen 21.5 per cent from the price they were sold at. Other transactions also ran aground, highlighting the troubles companies have in sealing deals. China National Chemical could not finalise a US$2.7 billion bid for Nufarm, Australia's largest agrochemical maker, when a partner in its consortium, Blackstone, pulled out when it could not arrange the appropriate financing it felt it needed to get the deal done. China National has indicated it is still interested in buying Nufarm. China National Petroleum Corp, the parent of PetroChina, had its US$2 billion purchase of US-based Devon Energy Corp's West African assets thrown into doubt over valuation disagreements and moves by the government of Equatorial Guinea to influence the outcome of the deal.
