Daily Management Review

China is borrowing money to buy up foreign assets


04/07/2016


After two weeks of struggle with other contenders, Chinese insurance company Anbang suddenly refused to buy the American hotel chain Starwood Hotels & Resorts Worldwide Inc. for $ 14 billion.



pixabay.com
pixabay.com
However, the Chinese’s attempt to purchase the major foreign asset is another confirmation that the world was covered with wave of mergers/acquisitions (M & A) involving purchasers from China.
This year alone, Chinese companies (usually with little international experience and huge debts) announced M&A cross-border transactions in the amount of $ 100 billion. For the full 2015, Chinese spent $ 61 billion on foreign buying.

This investment boom is, to a certain extent, a positive thing for the world economy. In I quarter, the number of international M&A fell by 25% compared with the previous year. The collapse would be even greater without China's insatiable appetite.

The Chinese are interested in diverse sectors, from cosmetics to construction equipment. It seems they no longer stick to raw materials and energy, tells The Economist.

In the past five years, China's share of cross-border M&As was 6%; yet it accounts for almost 15% of global GDP. According to Fred Hu of the investment firm Primavera Capital, the second economy in the world "still has enough space to increase overseas acquisitions."

However, some observers have expressed concern: a sharp interest in foreign investment would be a sign of the Chinese economy’s weakness. The renminbi’s devaluation against the dollar in the past two years, as well as the slowdown in domestic growth, have radically changed the situation. However, instead of turning to austerity, Chinese companies are investing abroad.

The financial structure of the latest deals is alarming, too. Chinese buyers tend to have more debt than firms they acquire. According to the S&P Global Market Intelligence, Chinese buyers had 71% mid-coefficient between own and borrowed funds in deals announced in early 2015; meanwhile, companies they bought had the rate at 44%. 

In addition, buyers from China do usually have piles of cash: their liquid assets are by about a quarter less than the immediate liquidity commitments.

Where do they get huge amounts of money for foreign takeovers? Most take new loans. Chinese banks consider lending to Chinese companies abroad as a safe way to obtain international fame. In addition, the Chinese government actively supports cross-border transactions.

Until the acquired companies have a stable cash flow, banks are happy to help with the financing, and turn a blind eye to the Chinese borrower's heavy debt. Foreign banks, including HSBC, Credit Suisse, Rabobank and UniCredit, are massively offering their services, too.

For example, now a number of European banks are involved in the issuance of syndicated loans for ChemChina. The latter has announced acquisition of Swiss Syngenta (the world leader in the production of crop protection products and seed) for $ 43 billion.

When the financial position of the customer rather shaky, bankers calm themselves with two things: firstly, the deals will generate profits, and secondly, the political status of customers, especially when they are state-owned companies, will protect them from unexpected surprises. "Everyone is convinced that the company-absorber becomes too large to fail," - explains a consultant on M&A transactions. 

source: economist.com






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