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China's plan to buy Canadian mining giant Noranda for US$5 billion (HK$39
billion) is just the beginning of an overseas acquisition march fuelled by
swollen foreign exchange reserves and a need to secure natural resources.
But bureaucratic state ownership and a lack of experience in running foreign
firms could slow the pace of China's venture overseas, analysts said.
"You will see more and more overseas investment by Chinese enterprises in the
form of corporate takeovers or others. The momentum is getting strong,'' said
Chen Jiulin, the head of Beijing-run China Aviation Oil (Singapore), which is
buying a stake in a Singaporean refining company.
"But challenges are many. For one, China lacks its own human resources to run
businesses overseas. There are few who really know how to handle international
businesses,'' said Chen, who is also president of an association of mainland
companies in Singapore.
Chinese companies have to date invested more than US$12 billion overseas, Chen
said, citing official data. Much of that was invested in individual assets
rather than entire companies.
The main investors have been oil and gas producers, and appliance makers such as
Haier Group and TCL that are trying to become global brands.
State-owned China Minmetals is taking the game to a new stage.
It is in exclusive talks to buy all of Noranda, the world's No3 zinc and No9
copper producer, in a mostly cash deal to be worth more than US$4.7 billion,
the firms said on Friday.
The acquisition, which would be China's largest takeover of a foreign company,
is driven by the country's insatiable hunger for raw materials to fuel economic
growth.
It is backed by surging currency reserves, which rose 20 per cent in the first
seven months of this year to hit US$483 billion, the second highest in Asia.
Similar deals are likely to follow, analysts say, with firms in the natural
resources sectors the most acquisitive.
"We are going to see more resources and commodities firms with strong balance
sheets buying overseas assets to support the booming economy,'' Atlantis
Investment fund manger Yang Liu said.
Sinochem Corp signed a deal on Friday to buy South Korea's smallest refiner,
Inchon Oil, for US$549 million - China's first takeover of a foreign oil
company.
State oil firms have spent US$5 billion on overseas oil and gas fields in the
past 10 years to support flagging domestic production.
They are hoping a more acquisitive strategy will boost oil and gas reserves at a
faster pace.
China is the world's second-biggest oil consumer after the United States.
Cash-rich companies such as China National Petroleum Corp - parent of the
country's dominant oil producer, PetroChina - and CNOOC have put several
foreign oil and gas producers on their radar screens, sources said.
Chinese firms have enough cash to win over rivals worth US$10 billion, enough to
buy a company such as Woodside Petroleum, Australia's largest listed
oil-and-gas firm, and Unocal and Devon Energy of the US, sources have said.
PetroChina is looking at the oil assets owned by top Canadian oil and gas
exploration firm EnCana Corp in Ecuador. The assets, by some estimate, are
worth more than US$1.5 billion.
Another factor driving companies overseas is to gain overseas experience. One
example is China Huaneng Group's purchase of two power plants in Australia in
December.
The purchase was aimed at learning about a competitive power market, which
electricity-starved China is trying to set up.
"I don't expect to see many Chinese power companies investing overseas. Oil and
gas and natural resource companies are very different; they have compelling
rationales to boost strategic reserves,'' said Sheldon Trainor, managing
director of Morgan Stanley's investment banking group for general industries in
Asia.
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