"But I suppose if the economy were to unexpectedly weaken dramatically, and we decided that we needed to use a full array of monetary policy tools to provide stimulus, it’s something that we would contemplate as a potential action," he said on Jan. 15.
《耶路撒冷邮报专栏转载》Iran and China: Business as usual
“Chinese car manufactures in Iran are well established”
“Some Iranian news outlets have run pieces predicting the “Golden age of Chinese cars [is] over in Iran”
《伊朗投资指南》Iran automotive industry is the second biggest sector in country
经过几十年的制裁，伊朗几乎就是处于封闭的状态。但因为中伊关系的友好，给中国企业开发伊朗市场还是带来了不少机遇。在伊朗除了藏红花、开心果、香料等是伊朗本地的产品，可以说市面上约80%-90%的轻工类产品都是Made in China。在这边讲一个小插曲，前几年，我第一次带我妻子和孩子去伊朗，回国时想带点伊朗特产，在逛街的时候看到很多工艺品挺好看的，所以就想带些工艺品回国。但是，当我们询问清楚之后发现，我们所能看到的工艺品几乎都是从中国进口的，甚至在工艺品的底部还留有“Made in China”的标志。
就伊朗的汽车行业而言。汽摩配件是一个非常大的市场，尤其是汽车零部件。伊朗国内汽车消费量很大每年具有两三百万辆的市场空间。伊朗本国主要有2个汽车品牌Saipa & IKCO 是伊朗两大国有汽车企业，总计占47%的市占率，中国品牌占10%左右，日韩品牌占7%左右。现在各国的汽车行业都瞄准了伊朗市场。中国自主品牌在伊表现抢眼，如长安、江淮、力帆、奇瑞等都已经进入伊朗汽车市场，不仅有汽车合作项目，也占有一定的市场份额。法国汽车已经开始行动起来了，2015年3月，标致雪铁龙（PSA）集团已经与伊朗霍德罗汽车公司（Khodro）签订了合资协议。像在国内畅销的K5，在伊朗当地的售价几乎高出中国市场价的20%，而且都是现金交易。从这一点上，我们也可以看出伊朗强大的经济实力和消费能力。
Yan Xuetong, the director of the Institute of International Relations at Tsinghua University in Beijing, argues for a more assertive foreign policy for China in his latest book, “The Transition of World Power: Political Leadership and Strategic Competition.” In the book, which the Chinese state news media has reviewed favorably, he advocates what he calls moral realism as a rising China challenges the United States for world leadership. This approach would combine a greater emphasis on forging military partnerships abroad while building a more humane society at home.
Mr. Yan, 64, holds a Ph.D. in political science from the University of California, Berkeley, and in 2008 was listed among the world’s top 100 public intellectuals by Foreign Policy magazine. In an interview, he explained why it is time for China to cut back on economic aid to other countries, why North Korea is not China’s ally and why he sees rivalry but not war with the United States:
【问】 You say that China should establish military alliances, like the United States does. China already provides military assistance to Myanmar, Laos, Cambodia and some members of the Shanghai Cooperation Organization and is building a naval support installation in Djibouti. Should China have military bases in these countries?
Yan Xuetong Credit Courtesy of Yan Xuetong
【答】 For its own interests, China should consider having military bases in countries it considers allies. Unfortunately, the Chinese government insists on a nonalliance principle. It’s too early to say where China would build military bases, since China now has only one real ally, Pakistan.
【问】 You say that North Korea is not an ally despite the alliance treaty signed between the two countries in 1961. Why?
【答】 In 2013, China publicly denied that it had an alliance with North Korea and declared that the two simply had “normal relations.” The two countries’ leaders haven’t met for years, and that’s not how allies behave. China’s relations with North Korea are worse than those with South Korea, which is an ally of the United States.
【问】 What’s holding China back from forming alliances?
A: Some believe it’s due to a lack of military might, but I think it comes from not seeking truth from facts. The nonalliance principle adopted by the Chinese government in 1982 was the right strategy when China was a very weak power and served the country’s interests well for two decades. But since then China has become the world’s second-largest power, and the nonalliance principle no longer serves its interests. The major obstacle to China abandoning its nonalliance principle is years of propaganda criticizing alliances as part of a Cold War mentality.
【问】 How can China acquire more allies? Provide more economic and military aid?
【答】 It’s impossible to change the nature of China’s relations with other countries with just economic assistance or loans. So I don’t think China’s One Belt, One Road initiative for economic development across Eurasia can fundamentally change the nature of the relations.
【问】 You said recently that China should reduce its economic assistance to other countries. Why?
【答】 I think China should limit its economic assistance, including outright aid and loans, to 1 percent of its annual foreign reserves, which amounted to about $35 billion in 2015. The current amount has been way too high given China’s capabilities. In most cases, loans to underdeveloped countries end up being written off rather than repaid.
We should scale back this economic assistance and switch to military aid. Military aid should be given to friendly countries to improve strategic cooperation and secure political support. But China should be very cautious about participating in military conflicts in the Middle East. China should learn a lesson from Russia’s military involvement in Syria.
【问】 How would China abandoning its nonalliance policy change the dynamics between China and United States?
【答】 Any change would only be positive. The more allies China makes, the more balanced and stable the relationship will be. The more China shies away from alliances, the greater the chance that Washington will contain China, therefore resulting in an unstable relationship.
There won’t be a direct war between the two sides, because they’re both armed with nuclear weapons. The problem now is that the two are not willing to admit that they’re in competition. They’re still pretending to be friends.
During U.S. Vice President Joe Biden’s visit to China in 2011, Xi Jinping suggested the idea of “healthy competition” between China and the United States, and this was well received by Biden. When both sides define the nature of their relationship as competition rather than cooperation, they have lower expectations of the other’s friendly actions and higher tolerance of the other’s hostile actions. Thus both sides will be cautious about provoking the other side and will avoid allowing conflicts to escalate to disaster.
Unfortunately, “healthy competition” was later replaced by a “new type of great power relations” [Mr. Xi’s proposal of a relationship between equals based on cooperation and avoiding confrontation] and the chance for stabilizing bilateral relations perished.
【问】 In recent years, some of China’s neighbors seem to have felt less secure because of China’s greater assertiveness, especially in the South China Sea. Has the Chinese approach backfired?
【答】 It’s only the Philippines and Vietnam that have major disputes with China in the South China Sea, and they’re just two of China’s more than 30 neighbors. Singapore and Thailand, two longtime allies of the United States in the region, have become much closer to China in recent years.
China’s South China Sea policy is only intended to safeguard its own interests, so I don’t think it’s overly assertive, but rather that previous policies were not forceful enough.
The South China Sea dispute is just an obstacle on China’s path to greater power, which the United States has been unwilling to accept. It is a result, rather than the cause, of the rivalry between China and the United States. It will be up to the United States to decide if it wants to go to war with China for the sake of the Philippines and Vietnam. It’s not China’s call. The United States recently gave its support to Japan for its involvement in the South China Sea, which means the United States has not decided to confront China directly there.
【问】 You say that moral realism means building a better society at home, under a form of leadership based on an ancient Chinese philosophy called humane authority. What does that mean specifically?
【答】 Moral realism involves leading by example, which means China needs to practice the moral principles it advocates to the world both at home and abroad. The core principles suggested by moral realism are fairness, justice and civility. Equality, democracy and freedom are also important principles advocated by moral realism.
Moral realism suggests that the essence of democracy should be the same for all countries including China, even though it takes different forms. The essence is that political leadership should be corrected by criticism from the people.
In ancient China, remonstration officials enjoyed immunity from punishment while delivering complaints directly to the emperor. Freedom of speech is necessary for a humane authority, but the remonstration official system is more important because it’s a more efficient way of correcting strategic mistakes than freedom of speech.
【问】 Wouldn’t a “humane authority” lead the world by doing what is widely considered right? For example, should China sanction North Korea for its recent nuclear test?
【答】 That would be a Western hegemonic idea. A humane authority sees everyone on equal terms. If North Korea is not entitled to nuclear weapons, then China and the United States should guarantee North Korea its security in return for denuclearization. That’s what we call leading by example and fairness. It’s only Western countries that are calling for sanctions without considering a fair solution, and they make up only about 20 percent of the world’s 195 countries.
The country saves too much, but higher wages and taxes could help eliminate the surplus
The policies known as Abenomics, after Shinzo Abe, Japan’s prime minister since December 2012, were a bold attempt to revitalise the Japanese economy. The quiver of Abenomics contains three “arrows”: fiscal policy, monetary policy and structural reforms. Will they deliver the revival Mr Abe promised? It is, alas, unlikely.
Of the three, monetary policy has been shot most aggressively. Under the policy of quantitative and qualitative easing adopted in April 2013, the Bank of Japan has increased its balance sheet from 34 per cent of gross domestic product at the end of the first quarter of 2013 to 73 per cent two and a half years later. Relative to GDP, the BoJ’s balance sheet dwarfs those of the Federal Reserve, the European Central Bank and the Bank of England (see charts).
The arrow of fiscal policy has, however, not been shot. According to the International Monetary Fund, Japan had a cyclically adjusted fiscal easing of only 0.4 per cent of gross domestic product in 2013. The cyclically adjusted fiscal deficit tightened by 1.3 per cent of GDP in 2014, largely because of a misconceived jump in the rate of consumption tax, from 5 to 8 per cent, in the spring of 2014. A comparable tightening is forecast for 2015.
Finally, structural reforms have been quite modest. The government has reformed agricultural co-operatives. It has also agreed to liberalisation in the Trans-Pacific Partnership (TPP), the US-led trade pact. It has made modest progress on energy and tax reform. Improvement in opportunities for women is moving at a glacial pace. Increasing immigration remains largely taboo. The labour market has entrenched differences between permanent and temporary workers.
What have been the results so far? On inflation, Japan has made modest progress. In the year to October 2015, core inflation (all items, less food, alcoholic beverages and energy) was just 0.8 per cent, still far below the 2 per cent target. On output, the outcome is also disappointing. Real GDP rose 1.7 per cent over the year to the third quarter of 2015. Yet, between the end of 2012 when Mr Abe became prime minister and the third quarter of 2015, the economy grew a mere 2.4 per cent in real terms, and was only the same size as the first quarter in 2008.
A fundamental question is whether Abenomics has correctly identified what is ailing the Japanese economy.
The labour market, for example, performs excellently. The unemployment rate was just 3.1 per cent in October 2015. When one allows for the shrinking labour force, the growth performance is not bad either. Trend annual growth of GDP per person of working age was 1.5 per cent between 2000 and 2010, and then 2 per cent between 2010 and 2015. Both rates were the highest in the Group of Seven leading high-income countries.
According to the IMF, Japan’s GDP per head at purchasing power parity was only 69 per cent of US levels in 2014, ahead only of Italy within the G7. Radical reform might generate faster catch-up growth. But it would be remarkable if Japan were to sustain annual growth of GDP per worker at more than around 1.5 per cent. Without mass immigration, even this would imply potential annual growth of around 1 per cent, well below the 2 per cent envisaged. According to the BoJ, the potential annual rate of growth rate is now only 0.5 per cent.
Supply, then, is not Japan’s problem — or, if it is, it is because of the shrinkage of the labour force. The real problem is the weakness of private demand. The indicator of that is the enormous private sector financial surpluses — the excess of private savings over private investment. This surplus has oscillated between 5 per cent and 14 per cent of GDP since the mid-1990s.
A country with a declining population does not need to build more houses — the main investment by households. Household investment has fallen from 7 per cent of GDP in the early 1990s to below 4 per cent. This fall has offset the decline in household savings rates. The result has been a chronic household financial surplus.
The corporate sector financial surplus is even bigger. It averaged 7 per cent of GDP between 2001 and 2013, and, at its peak, in 2009 and 2010, reached 9 per cent. This corporate surplus is due to strong corporate savings, which averaged 22 per cent of national income since the early 2000s, and mildly declining corporate gross investment, which averaged 14 per cent of GDP over the same period. But this investment rate is still remarkably high by the standards of other G7 countries.
The counterpart borrower has been the government. The ratio of gross public debt to GDP jumped from 67 per cent in 1990 to 246 per cent in 2015, while the ratio of net debt increased from 13 to 126 per cent. Yet, despite sustained fiscal deficits and near-zero short-term interest rates, the mild deflation has not been durably eliminated.
The BoJ’s purchases of low-yielding Japanese government bonds (JGBs) are highly unlikely to eliminate the private sector’s huge financial surpluses.
"It is, in brief, ‘not the supply, but the demand, stupid’"Tweet this quote
So what is to be done? A first option is to continue with today’s large fiscal deficits and central bank purchases of JGBs, in the hope that the surpluses of the private sector will soon disappear. Unfortunately, this seems unlikely. If so, the fiscal deficits cannot be safely eliminated. This policy will end up as permanent monetisation of deficits.
A second option is to admit that the policy is monetisation. The BoJ would agree with the government on monetary financing or on transfers to households. Moreover, given the public sector debt overhang in Japan, a new and higher inflation target could also be set, with a view to lowering the debt burden.
A third option is to impose fiscal austerity. Some will argue that the private sector would recognise the improved solvency of the state and so cut back on excess savings. In Japan, this argument looks implausible. The result is more likely to be a deep recession.
A fourth option is to export the excess savings via a bigger current account surplus. This is exactly what Germany has done. The real effective exchange rate has depreciated by some 30 per cent since Mr Abe became prime minister. To do this, the BoJ could purchase foreign bonds. Alternatively, the government could set up a sovereign wealth fund financed by the sale of JGBs. Yet such policies, if pursued on a large enough scale, would worsen global imbalances. That would be unpopular abroad.
A fifth option is to attack the private sector’s chronic savings surplus head on. To do that, one must first recognise that Japan saves too much. So raising taxes on consumption is the opposite of what should be done.
Shifting Japan’s excess corporate retained earnings into wages and taxes would go a long way towards eliminating the structural savings surplus. One could slash depreciation allowances, for example. Reform of corporate governance might also increase the distribution of corporate earnings. Yet another possibility would be to force up wages.
It is, in brief, “not the supply, but the demand, stupid”. The structural savings surpluses of the private and, in particular, of the corporate sectors have driven the government into its deficits and growing debts. Abenomics does not recognise this underlying reality. Japan must offset the private surpluses, export them or eliminate them. This is the dominant challenge.
The first step is to recognise the core problem — one of insufficient private demand. Only then can it be solved.
The risk of a US recession is back on the agenda, and rapidly moving towards the top of it. As the year turned, with many concerns facing the globe, it was treated as axiomatic that there was no risk of imminent recession in the US, and hence any damage would be limited.
Any growth in recession risk from that low level would inevitably lead to falls in the price of risk assets, which is exactly what we have seen, even if an outright US recession remains on balance unlikely. The litany of market indicators that make no sense unless there is a clear and imminent danger of a recession is growing longer.
Long-term inflation expectations are their lowest since the crisis; the spreads on corporate and particularly low-quality high-yield credit are widening; the yield curve — as shown by the gap between two- and 10-year Treasury yields — is the flattest it has been since 2007, showing scant belief that inflation or interest rates will be rising in the years ahead. And of course the stock market is down, while within it defensive stocks like Walmart or Procter & Gamble are far outperforming cyclical stocks that would fare worst in an economic downturn.
These are all market-generated indicators. They show that we are now in at least the most severe US “growth scare” since the Great Recession in 2009, and these financial conditions in themselves heighten the risk of a recession, by making life harder for companies and consumers. Should the recession fears be averted, this also implies that there is a nice rebound to be had from stocks and from betting against bonds.
So what is the possibility of a recession, and how can it be calculated?
According to the US fund manager John Hussman, who writes a widely followed weekly commentary and has been notably bearish in recent years, a recession is now an “imminent likelihood”. He suggests financial markets generally act as leading indicators — which they are doing — followed by data from the industrial economy. Industrial production has fallen in 10 of the last 12 months; historically, going back to 1919, every time it has fallen as many as eight times in such a stretch, there has been a recession.
Over the past 12 months, Alan Ruskin of Deutsche Bank points out, no country’s ISM index has fallen more than that of the US — casting grave doubt on its ability to play the role of the world’s growth locomotive that many had put aside for it.
Mr Hussman adds weakness in retail sales as further evidence, while confirmation would come from worsening unemployment data and from big falls in consumer confidence.
Financial conditions are also important. When banks are making it harder to borrow, it is usually a good sign that a recession is coming — and that is what they are doing. The latest survey of senior loan officers by the Federal Reserve, produced this week, showed a growing majority of banks saying they were tightening their lending standards for commercial and industrial loans, in a way unseen since the crisis, which is a worrying sign — although there was no such tightening for real estate loans or for consumer loans.
Corporate profits provide ample cause for concern. Companies are finding it hard to maintain their profit margins or increase their revenues — again possibly a testament to the strength of the dollar.
However, the evidence that the US is not yet in recession remains strong. Aneta Markowska, of Société Générale, puts the chance that the US was already in recession in December at 3 per cent, using a model based on private employment, real income, real sales and industrial production. Only the last is anywhere near recession territory.
SocGen’s model of recession risks based on economic fundamentals suggest the risk is almost negligible; wage pressures are only just beginning, monetary policy is still very easy and profits made on domestic businesses are still high, while corporate balance sheets are healthy, outside of energy. All of this points to a cycle that does not turn into a downturn until 2018 or 2019.
Credit Suisse conducted a similar exercise, with a similar result as it concluded that the US is not in recession now, and will not be later this year either.
A clear signal that these forecasts were wrong, that would move the models towards a recession signal, would come from the labour market, where the rate of improvement has slowed in recent months.
The labour market provides the strongest evidence that the US is not heading for a recession and forthcoming data will be critical in determining whether this is a growth scare that will blow over — bringing a nice rally with it — or the start of the recession that markets are signalling.
HONG KONG — China is spending billions of dollars on a major push to make its own microchips, an effort that could bolster its military capabilities as well as its homegrown technology industry.
Those ambitions are starting to be noticed in Washington.
Worries over China’s chip ambitions were the main reason that United States officials blocked the proposed purchase for as much as $2.9 billion of a controlling stake in a unit of the Dutch electronics company Philips by Chinese investors, according to one expert and a second person involved with the deal discussions.
The rare blockage underscores growing concern in Washington about Chinese efforts to acquire the know-how to make the semiconductors that work as the brains of all kinds of sophisticated electronics, including military applications like missile systems.
In the case of the Philips deal, the company said late last month that it would terminate a March 2015 agreement to sell a majority stake in its auto and light-emitting diode components business known as Lumileds to a group that included the Chinese investors GO Scale Capital and GSR Ventures. It cited concerns raised by the Committee on Foreign Investment in the United States, which reviews whether foreign investments in the country present a national security risk.
James Ding Jian, managing director and chairman of GSR Ventures, whose bid for Lumileds was blocked by the United States for national security reasons
Philips said that despite efforts to alleviate concerns, the committee — known as Cfius — did not approve the transaction.
“There is a belief in the Cfius community that China has become innately hostile and that these aren’t just business deals anymore,” said James Lewis, a senior fellow at the Center for Strategic and International Studies, a research firm, who speaks to people connected with the committee’s process.
Philips did not respond to requests for comment. GSR Ventures, which sponsors GO Scale Capital, declined to comment.
Cfius, an interagency body that includes representatives from the Treasury and Justice Departments, declined to comment and does not make its findings public.
Cfius reviews have been a growing problem for outbound Chinese deals. According to the most recent data available, in 2012 and 2013 Chinese investment accounted for more committee reviews than money coming from any other country. A 2008 Chinese effort to invest in the network equipment company 3Com was withdrawn while the committee was reviewing it.
Recently, the committee found acceptable a number of major Chinese deals, including a takeover of Smithfield Foods by Shuanghui International and Lenovo’s takeover of IBM’s low-end server unit. In 2012, President Obama ordered a Chinese company to stop building wind farms near an American military installation in Oregon after a negative Cfius review.
At the center of the committee’s concerns on the Philips deal, according to Mr. Lewis, was a little known but increasingly important advanced semiconductor material called gallium nitride. Though not a household name like silicon, gallium nitride, often referred to by its abbreviation GaN, could be used to construct a new generation of powerful and versatile microchips.
It has been used for decades in the low-energy light sources known as light-emitting diodes, and it features in technology as mundane as Blu-ray Disc players. But its resistance to heat and radiation give it a number of military and space applications. Gallium nitride chips are being used in radar for antiballistic missiles and in an Air Force radar system, called Space Fence, that is used to track space debris.
Wan Long, right, of the WH Group, and Larry Pope of the American pork company Smithfield Foods. WH Group acquired Smithfield in 2013. The Committee on Foreign Investment in the United States approved that deal
“Gallium nitride makes better-performing semiconductors that were key in upgrading Patriot radar systems,” said Mr. Lewis. “It’s classic dual use, sensitive in that it could be used in other advanced weapons sensors and jamming systems.”
Advancing its chip industry has been a major political initiative for Beijing. In recent years, analysts said, Chinese corporate espionage and hacking efforts have been aimed at stealing chip technology, while Chinese firms have used government funds to buy foreign companies and technology and attract engineers.
Last year, different subsidiaries of the state-controlled Tsinghua Holdings made a number of bids for American companies, including an unsuccessful $23 billion offer for the American memory chip maker Micron Technology and a successful $3.78 billion purchase of a 15 percent stake in the hard-drive maker Western Digital.
Last year’s spree of deal activity, and lack of American regulatory response, spurred a Sanford C. Bernstein analyst, Mark Newman, to say in a November report that the United States “runs the risk of being asleep at the wheel.” He cited efforts by South Korea and Taiwan to prevent China from acquiring some technology assets.
The Lumileds block is being interpreted by the chip industry as the United States “waking up a bit to the threat,” Mr. Newman said in an email.
Gallium nitride is particularly sensitive. One military industry magazine called the material the biggest thing since silicon, which is now commonly used to make the transistors in microchips. It cited Raytheon’s use of the material to make smaller, low-powered radar for American missile systems.
“Many say it’s the most important semiconductor material since silicon,” said Colin Humphreys, a British physicist at Cambridge University.
He said that while it was not clear what the United States government was worried about, research by LED companies into technology linking gallium nitride and silicon could have broader implications for creating advanced microchips that could be used in a wide array of electronics.
The would-be investor in Lumileds, GSR Ventures, also holds a stake in Lattice Power, a Chinese company that has been vocal about its efforts to develop technology related to gallium nitride and silicon.
In a November 2015 statement about a recent investigation into Chinese industrial espionage, Taiwan’s Ministry of Justice also expressed worries about China aiming at the material. Calling the mass production of gallium nitride a “key development project” for China, the ministry said it was concerned about the theft of trade secrets from Taiwanese companies working on the material and Chinese-led recruitment of engineers knowledgeable about it.
Acquisitions have totaled roughly $68 billion so far this year, the strongest volume ever for this period
If approved by Syngenta shareholders and regulators, ChemChina’s $43 billion offer to buy Syngenta would be the largest foreign takeover by a Chinese company
KATHY CHU and JULIE STEINBERG
Chinese companies have launched a record wave of foreign acquisitions in the first few weeks of 2016 as they seek inroads into overseas markets amid China’s slowing economy and falling currency.
China National Chemical Corp., known as ChemChina, on Wednesday said it would pay $43 billion to buy Swiss pesticide maker Syngenta AG in a deal that, if approved by Syngenta shareholders and regulators, would be the largest foreign takeover by a Chinese company.
Including the ChemChina deal, the combined value of China’s outbound mergers and acquisitions has reached about $68 billion so far this year, the strongest volume ever for this period and already more than half of 2015’s record annual tally, according to deal tracker Dealogic.
Other Chinese companies, such as Haier Group and China Cinda Asset Management Co., have also been ramping up their foreign-asset purchases in recent years as China looks to bolster its capabilities in industries including agribusiness, real estate and energy.
Companies such as ChemChina that are run by China’s government—or state-owned enterprises—are among those buying. A push by President Xi Jinping to boost overseas trade through the “One Belt, One Road” initiative aims to open up new markets from Central Asia to Europe for Chinese companies that previously focused at home.
The policy, invoking the spirit of the old Silk Road trading route between East and West, means government cash may be available to help finance state-owned enterprises, or SOEs, wanting to buy foreign assets.
But Chinese companies’ purchase of foreign assets may come under scrutiny at home, as the deals come at a tricky time for the economy.
Beijing is stepping up efforts to halt a flood of money leaving the country in response to the slowdown and a currency that has fallen 5.5% against the U.S. dollar since August. China’s latest efforts involve curbing the ability of foreign companies in China to repatriate earnings and banning yuan-based funds for overseas investments, people with direct knowledge of the matter have said.
The Chinese government’s concern over capital outflows—which may have been as high as $1 trillion last year, by some estimates—may mean that regulators in Beijing look more closely at certain acquisitions of foreign assets, analysts said. But the government will still likely support foreign deals that are seen as a cornerstone of Chinese companies’ overseas expansion, they said.
“It’s the nature of the assets that determines Beijing’s support,” said Derek Scissors, resident scholar at the American Enterprise Institute, a Washington-based think tank.
Chinese acquisitions of key Western technologies are likely to face stiff scrutiny overseas.
In the U.S., a federal agency that screens corporate takeovers for security concerns recently nixed a deal by a Chinese investment fund to buy the lighting business of Royal Philips NV. The business had manufacturing, research and development facilities in the U.S.
The agency, the Committee on Foreign Investment in the U.S., is likely to look closely at the ChemChina-Syngenta deal because most of Syngenta’s seed business is in the U.S.
Overall, “we see the deals getting bigger and bigger,” said Patrick Yip, mergers and acquisitions leader for Deloitte China, referring to Chinese companies’ acquisitions of foreign companies. “I am working on a number of them. Chinese companies want brand power and high technology.”
David Brown, transaction services leader for PricewaterhouseCoopers China and Hong Kong, predicts around 50% growth for outbound Chinese mergers and acquisitions every year, for the next several years.
There is “huge pent-up demand,” said Mr. Brown, as Chinese companies gain confidence to pursue global deals.
The depreciation of the yuan—and the expectation that it will continue falling—means that Chinese companies are looking to buy now before the price of foreign assets gets more expensive, said Rocky Lee, a Beijing- and Hong Kong-based partner at law firm Cadwalader.
China’s yuan, after strengthening by more than 30% over the past decade, has fallen 8% against the U.S. dollar since the beginning of 2014 as policy makers seek to make their currency more market-driven and grapple with a deepening economic slowdown.
Some analysts believe the yuan could fall up to 10% more by the end of this year amid fears that the Chinese economy is slowing faster than expected and as the government’s moves to contain market forces send capital flooding out of China.
Chinese state-owned enterprises, for one, are receiving strong backing for strategic foreign acquisitions from the central government.
“A lot of the [state-owned enterprises] are fairly cash-rich,” says Ben Cavender, a Shanghai-based principal at China Market Research Group. “One of the issues they’re running into is they’re out of room to grow in their home market.”
ChemChina, when it agreed to buy Italian premium tire maker Pirelli & C. SpA for roughly $7.7 billion last year, had secured funding from an overseas investment vehicle championed by China’s president.
Under the deal, Silk Road Fund Co.—an investment vehicle controlled by China’s State Administration of Foreign Exchange and other state-owned entities—took a 25% stake in the ChemChina subsidiary set up to acquire Pirelli’s shares.
The government is likely to continue providing financial support for SOEs to buy foreign assets in areas such as technology, energy and infrastructure, said Mr. Lee of Cadwalader.
ChemChina, the company making China’s biggest takeover bid yet, is part of a phalanx of highly-leveraged corporations that are spearheading “China Inc’s” purchase of foreign assets and raising questions over the financial sustainability of acquisitions.
So high are the debt levels at ChemChina and several other companies behind some of the country’s biggest overseas investments that financing for the deals would have been difficult or prohibitively expensive were it not for the backing of the Chinese state, analysts said.
ChemChina, which bid $43.8bn for Syngenta, a Swiss company, is in poor financial shape. It made a net loss of Rmb889m in the third quarter of last year and carried a total debt of Rmb156.5bn ($24bn). The debt load was equivalent to 9.5 times its earnings before interest, tax, depreciation and amortisation at the end of 2014, well above the international standard for excessive leverage of 8 times ebitda.
However, Kalai Pillay, a director at the Fitch credit-rating agency, said ChemChina’s status as an enterprise owned by Beijing’s State-owned Assets Supervision and Administration Commission (Sasac) ensures that it can get “unlimited access to funding from state banks”.
But there is a danger for Syngenta and other acquisition targets. If Chinese state backing for an overseas deal starts to ebb, then a highly-indebted parent company could squeeze its new subsidiary for dividends to repair its balance sheet, Mr Pillay said.
Such concerns, in the case of ChemChina, are exacerbated by a scattergun pattern to the company’s acquisitions, raising doubts over where its strategic priorities lie. The company’s core business involves oil, pesticides and animal feed, but it has recently bought Pirelli, the Italian tyremaker, for $7.9bn and agreed to pay $1bn for KraussMaffei, the German machinery company.
Questions over the strategy and sustainability of China Inc’s outward embrace do not end with ChemChina. Zoomlion, a lossmaking Chinese machinery company that is partially state-owned, made a $3.3bn bid for US rival Terex last month. Its total debt stands at 83 times its ebitda.
“Zoomlion’s bid is a desperate attempt to remain relevant,” said Mr Pillay.
Fosun International, a serial Chinese acquirer that spent $6.5bn on stakes in 18 overseas companies during a six-month period last year, had a total debt load 55.7 times its ebitda in June 2015. Fosun has bought brand names such as Club Med and Cirque du Soleil as well as a host of other assets including the German private bank Hauck & Aufhaeser.
chart: China companies debt
Similarly, the high-profile acceptance by Greece of a €368.5m bid by China Cosco Holdings for the Piraeus Port Authority, heralds the acquisition of one debt-ridden enterprise by another. Cosco had total debts equivalent to 41.5 times its ebitda last September, but has promised to invest €500m in the Greek port.
Cofco Corporation, which recently reached an agreement with Noble Group under which its subsidiary, Cofco International, would acquire a stake in Noble Agri for $750m, has total debts equivalent to 52 times its ebitda. Bright Food, which bought the breakfast group Weetabix for $1.2bn last year, has total debt at 24 times ebitda.
Diversification away from China’s slowing domestic economy has been one motivator behind the surge in outbound acquisitions, said David Lubin, head of emerging markets economics at Citi, an investment bank.
In recent decades, Chinese companies had been largely content to earn renminbi revenues because of a consensus that the Chinese currency was undervalued and because the return on capital inside China was strong.
“Now this has all changed. The return on capital inside China has fallen, the renminbi is no longer obviously undervalued and the capital account has been opened, allowing outward investment,” Mr Lubin said.
Technology distributor Ingram Micro Inc. agreed to be acquired for about $6 billion by a unit of Chinese conglomerate HNA Group.
The deal is the latest in a string of investments by Chinese companies in U.S. tech companies, including deals involving U.S. makers of computer chips that have attracted scrutiny on national-security grounds.
Ingram, founded in 1979, is one of the largest distributors of personal computers and other technology products including printers, scanners, TVs, videogame consoles, video monitors and software. The Irvine, Calif., company recently branched into a range of higher-margin professional services.
HNA’s Tianjin Tianhai Investment Co. will pay $38.90 a share for Ingram, representing a premium of about 39% over the average closing share price of Ingram Micro for the 30 trading days ended Tuesday. Ingram shares rose 23.6% to $36.65 in after-hours trading.
HNA Group, which claims more than 180,000 employees, evolved from marine shipping into operations that include transportation, logistics, tourism, banking and insurance. Its logistics group includes companies such as Jinhai Heavy Industry Co.
Alain Monié, Ingram Micro’s chief executive, said the deal would allow his company to accelerate investments in technology while becoming part of a larger organization with “complementary logistics capabilities and a strong presence in China.”
Chinese companies have become more aggressive lately in pursuing deals amid concerns about China’s weakening economic growth, investment bankers say.
In January, Zoomlion Heavy Industry Science & Technology Co. offered to buy U.S. crane-maker Terex Corp. for about $3.3 billion, an attempt to override an existing deal between Terex and Finland’s Konecranes Oyj.
In December, a group including China Resources Microelectronics Ltd. and Hua Capital Management Co. made an unsolicited bid for Fairchild Semiconductor International Inc., which already had a deal with U.S. chip maker ON Semiconductor Corp.
Fairchild on Tuesday rejected the Chinese proposal, stating a preference for the ON transaction. Fairchild cited, among other factors, risks that the deal would be rejected by U.S. authorities on national-security grounds.
Royal Philips NV in January terminated the planned $2.8 billion sale of most of its lighting components and automotive-lighting unit to a Chinese investor, after the U.S. Committee on Foreign Investment blocked the deal on national-security grounds.
Many technology companies use Ingram to run their supply chains. Ingram, a longtime wholesaler of computer components and peripherals, launched a third-party logistics unit in 2000.
The U.S. company has completed many acquisitions over the years, like a deal for e-commerce fulfillment company Shipwire. It launched a cloud-computing-services portfolio in 2007.
For the nine months ended Oct. 3, Ingram posted sales of $31.7 billion. In late October, it projected fourth-quarter sales of $12 billion to $12.6 billion.
Along with the deal, Ingram Micro is suspending its quarterly dividend payment and its share-repurchase program. Ingram’s management team will stay in place, including Mr. Monié, and the company will remain in Irvine, Calif.
The boards of both companies have approved the transaction, which is expected to close in the second half of the year.
Where once China could do no wrong in the eyes of investors, many are now too negative about the country.
This applies to its economy, which is slowing but not crashing, as resilience in consumer spending and the property market offsets sharp declines in heavy manufacturing; and it applies even more to its currency, with the bears who are betting on a sharp devaluation of the renminbi likely to be frustrated.
At first sight, the pessimists have a case. The People’s Bank of China announced over the weekend that its foreign exchange reserves fell by $99.5bn to $3.23tn in January. Ignore the fact that this was actually less bad than feared, and the counterargument that the figure was manipulated (since it was just a little too conveniently below $100bn). The truth is that FX outflows of this magnitude are simply not sustainable in the long run.
While China’s international reserves remain the largest in the world, they have dropped nearly three quarters of a trillion dollars since their peak in late 2014 as Beijing has spent heavily, indeed desperately, to shore up the renminbi. But ever since the mishandled tweak to its currency regime last August, the markets have lost confidence in the capabilities of China’s policymakers — and expressed that in increasingly heavy bets on renminbi depreciation through the CNH (the offshore version of the currency).
These speculators believe that at some point soon the PBoC will no longer be able to tolerate the rapid decline in reserves and its impact on domestic liquidity and will be forced into a significant one-off devaluation (of, say, 15-20 per cent) before potentially attempting to refix the renminbi against either the dollar or a broader currency basket.
What this view fails to appreciate, in the view of Medley Global Advisors, a macro research service owned by the FT, is both the determination and the capacity of the Chinese authorities to hold the line, while they work to reduce and eventually reverse the current expectations of further, relentless depreciation.
The first task is to reduce the level of outflows. Here officials are putting in place a plethora of capital controls while increasing their bureaucratic interference and oversight. For example, while households can still exchange up to $10,000 a day, they now need an advance appointment if they want more than $5,000 in hard currency.
Companies are also facing increased paperwork and regulatory checks on current account transactions. Some banks have been suspended from FX transactions, while the purchase of overseas insurance policies via credit cards has also been capped.
While these measures seem small and piecemeal, they could have a meaningful effect on the balance of payments at a time when China is still running a monthly trade surplus and is stepping up attempts to entice inbound capital flows, especially from long-term managers such as central banks and sovereign wealth funds by giving them greater access to various markets, such as the domestic interbank bond market.
Another aspect that is often ignored is that a sizeable portion of China’s recent FX outflows has been due to its companies repaying overseas debt . . . an outflow for sure, but perhaps a “good” one and certainly one that will decline as those liabilities are reduced from overly high levels.
Meanwhile, another chunk of the reduction in reserves is down to changes in portfolio valuations — looking at differences between data from the PBoC and Safe (the foreign-exchange regulator) suggests that fully a third of last year’s “outflows” were really just valuation adjustments.
Finally, Beijing will do its utmost to keep its currency stable ahead of hosting a G20 finance ministers meeting in late February, while the dollar’s recent weakness (over the past week or so) is undoubtedly relieving pressure on the PBoC.
So if the central bank can get past Chinese new year and the G20 to the meeting of the National People’s Congress in March, it should then be able to rely on further domestic policy support to help stabilise the economy. Until then, it seems prepared to continue intervening and enhancing the capital restrictions that have already been put in place.
China’s policymakers do not appear ready to give up the fight and the currency bears should beware.