China Revs Up Its Dealmaking Machine

The Chinese are in the midst of an M&A craze, doubling overseas investments last year. Could the deals benefit the global economy?

Is China Inc. intent on buying the world? It sure looks that way. Just in June and July, Chinese companies from oil refiner Sinopec (SNP) to carmaker Beijing Automotive and appliance giant Haier have invested or shown interest in investing in oil fields in Iraq, GM's Opel car business in Germany, an upscale appliance maker in New Zealand, and a Japanese department store. The sums involved range from tiny ($50 million for Haier's 20% stake in the New Zealand appliance maker) to hefty, at least by Chinese standards: Sinopec paid more than $7 billion for a Swiss oil company. A rumored bid for a Spanish-owned Argentine oil producer would be twice that.

China's total investments abroad, at $170 billion, come to only one-thirtieth the capital that the U.S. has spent on foreign factories, real estate, and other assets. But the Chinese have definitely been revving up their deal machine. China's overseas investments doubled last year, to $52 billion, and the Chinese government's economic planners have predicted a 13% increase this year, despite a slight slowdown last winter. In the crisis, "prices are getting better," says Daniel H. Rosen, a partner at New York advisory firm Rhodium Group and author of a recent report on China's outward investment. "That creates opportunities for China to go bottom-fishing." Beijing is also making it easier to acquire abroad. And non-energy companies are rushing overseas to buy skills in design and engineering.

The mergers-and-acquisitions craze is good news for lawyers, accountants, and investment bankers. JPMorgan Chase (JPM) and Morgan Stanley (MS) have both worked on high-profile China bids. PricewaterhouseCoopers has been involved with more than 125 transactions, and Bain & Co. has consulted for Chinese suitors, too. "It's a huge market not only for Bain but for many advisors," says Philip Leung, a Bain partner in Shanghai.

A big buildup in Chinese overseas M&A actually might benefit the global economy because it would recycle the dollars and other currencies earned by Chinese exporters in a healthier way. Right now, Chinese exporters don't have much use for the foreign exchange they earn. So the dollars pile up at China's central bank, which invests them in U.S. Treasury bills and the like. Meanwhile, the yuan that the exporters get for their dollars and euros feeds internal speculation and could stoke inflation. A flood of bids from the Chinese could also help put a floor under the prices of all kinds of companies.
Triggering Backlashes

Yet the deals will be no smooth ride for either Chinese acquirers or their targets. Although they are learning fast, the Chinese are not yet pros at M&A, and they often trigger backlashes from investors or voters in the countries where they show up. Plenty of blowups and setbacks are likely.

China has many incentives to keep playing the M&A game, however. China's companies are often flush with cash. Loans are not an issue when state-connected enterprises have Beijing's approval to invest overseas. "Most Chinese banks are state-owned, of course," says Zhou Chunsheng, a professor of finance at Cheung Kong Graduate School of Business in Beijing. "So companies find it very easy to raise money to expand their business into other countries."

Officials also want to stem the resentment evident in Internet forums and campus seminars against parking most of China's $2.1 trillion in foreign exchange reserves in low-yield, inflation-sensitive U.S. Treasuries. "Why would we want to keep subsidizing irresponsible U.S. behavior that will inflate the dollar and hurt us?" asks Wenran Jiang, a political science professor at the University of Alberta. Better, says Jiang, to purchase companies.