China: (I) - Investment Strategy and lessons for Ireland

Paul Sweeney11/07/2010

Paul Sweeney: When the Chinese state becomes one of the biggest shareholders in Guinness’ parent, and Volvo is bought by an obscure Chinese carmaker, Geely, it is time to examine what Chinese companies and investors are up to. Guinness, of course, is synomous with Ireland. Guinness is seen as our national drink, foreigners tell you they have drunk it and you, a Paddy, are supposed to be pleased.

Guinness ceased to be an Irish company in the late 19th century when it was quoted in London, and only recently its parent, Diageo, even considered closing its plant in Dublin, but decided not to do so. Now the Chinese Investment Company (CIC) owns 1.1% of Diageo, making it the 9th largest shareholder. The CIC is a massive Sovereign Wealth Fund (SWF) owned by the Chinese government, which is buying up shares in companies all over the world.

Over a number of posts, I will examine the role of China under three different headings. First, I will examine how extensive is the investment in companies and in countries. It will be seen that it is massive! It will also be seen that it is quite strategic and mercantilist. Thus, it does not conform to liberal economic theory. I will also examine how Chinese state companies are taking shares, in varying amounts, in all kinds of companies worldwide, through stock markets, trade sales etc.

Secondly, investment in China by Western firms and unionisation will be briefly examined.

Thirdly, I will briefly look at the debate on whether China, through its vast investment policies in Africa, is a new colonial power (and in other emerging countries and also in many developed economies, but to much smaller degrees, proportionately). Or is it simply investing benignly to maintain access to resources for its hungry factories and consumers?

Fourthly, I will show that China, Asian, Russian and other major and increasingly important economies are not following the Western economic orthodoxy. These important economies are, to varying degrees, authoritarian and if they do not reject neo-liberal economic ideology outright, they are quite wary and perhaps scornful of it. This is a major challenge to liberal orthodoxy. Yet it is to be welcomed, with some caution, by progressives who have been critical of the free market fundamentalism which led to the Crash of 2008.

One such change in “free market” policy – or one aspect of it, that is, privatisation - should now be radically reviewed. In regard to our own state companies, we might see them differently - as assets with major development value. Thus, it will be argued that the Irish Government’s decision to undertake a “stock taking” of the remaining Irish commercial state companies is timely, provided it is strategic and not short-term fire sales for a few million euro. It will be argued that the Chinese pragmatism on its state companies may be one which has some lessons for Ireland and our state companies and our much diminished (used on the private banking sector bailout) Sovereign Wealth Fund, the NPRF.

Let us begin by looking at the extent of Chinese investments. These are not the biggest investments, nor is the list comprehensive.

In June 2009, when Morgan Stanley, the US bank under government support, sought private capital, CIC subscribed US$1.2bn. Back in 2007, the Chinese Investment Company (CIC) had purchased $5.6 billion in MS common stock, or 9.86% equity ownership in Morgan Stanley.

CIC purchased, for an aggregate purchase price of CAD $435 million, 5% of Canadian company Penn West. It also invested CAD $817 million for 45% interest in a partnership to develop Penn West’s bitumen assets located in the Peace River area of northern Alberta. 2009: CIC bought in 45% of the equity in Nobel Oil Group based in Russia in late 2009, investing €300m in shares and in development. Hong Kong’s Oriental Patron acquired a 5% equity stake and the original Russian shareholders maintain their 50% stake.

Canadian mining and processing company Teck Resources sold a 17.2% stake to CIC in July 2009. It is the largest diversified mining, mineral processing and metallurgical company in Canada. The company is a major player in the production of copper, metallurgical coal and zinc. It has interests in 15 mines in Canada, the US, Chile and Peru, as well as exploration activities in four continents. CIC told Teck that it is acquiring the shares to become "a long-term passive investor" (at least a year!).

In the same time period, Chinese company, Sinopec, bought oil exploration company Addax Petroleum for $7.2 billion to develop oil sands. In June, Wuhan Iron and Steel Corp made a $400 million investment into Brazilian mining company MMX. Aluminum Corporation of China (Chinalco) took up its full entitlement in Rio Tinto's $15 billion rights offering. China expanded its interest in Mozambique’s natural resources, agreeing to invest $1bn in a coal project in June 2010.
The Chinese government invested $3 billion of its massive $1.2 trillion foreign reserves in the Blackstone Group, a major private equity fund. Blackstone is not a popular company, having been criticised as an asset stripper worldwide. It took a 12.5% stake in late 2008, and it was nodded through by the US Government because it was less than the threshold of 40% that it usually applied to prevent foreign takeovers of US corporations (so much for free markets, which, as most wise persons know, are seldom free). In contrast, in 2007, when the massive Chinese state oil company, CNOOC, sought to buy (all of the stock of) US oil company Unocal, it was stopped by the US government. Blackstone has bought up companies in China since, for example, pharmaceuticals firm Nufarm. China Investment Corp also invested €685m (£599m) into Apax Partners’ €11.2bn fund another private equity group in February 2010

Many of the major state-owned companies in China are now quoted on Stock Exchanges, and this means that they are now allowing in some private investors, but are included in international rankings of companies. It is estimated that of the top 500 global companies in the Fortune list, over 30 are Chinese state companies.
What is even more remarkable, from a policy perspective, is how many of the Fortune list of the top companies are former state-owned companies in many Western countries, and how many are still state owned, like France’s EDF, which owns much of the UK electricity industry.

In short, state companies have played a major role in developing some of the biggest enterprises of global scale throughout the world and continue to do so. Only the blind will ignore the role of state owned enterprises (SOEs) from a policy perspective. The proposed review of the Irish state owned companies must think in terms of developmental strategy, not of short term fire sales.

CIC, formed in September 2009, with RMB 1.55 trillion from the Chinese state, says that it selects investments based on economic and financial objectives, and an assessment of the commercial return and like any good Western capitalist, it seeks “to maximize shareholder value.” While it usually does not seek an active role in the companies in which it invests nor attempts to influence those companies’ operations, it may do so in certain circumstances. It seeks “long-term, stable, sustainable, and risk-adjusted returns.”

CIC states the “importance of operating responsibly – from how it runs itself and treats employees to how it selects investments. It is committed to operating responsibly and in full compliance of the laws and regulations in each of the jurisdictions in which it invests. CIC strives to contribute to the prosperity and development of local economies.”

As well as the sovereign wealth investment by the CIC, the many huge Chinese state companies are buying up stakes in private companies, taking over some outright, buying vast tracts of land for industrial type farming and buying financial assets all over the world. They are not just doing this to spread risk and diversify, as some Irish state companies like the ESB and DAA have done, but for national strategic reasons – to ensure adequate supply of minerals, oil, copper, etc., to the vast Chinese industrial complex. This is not the way of liberal economics.
In the next post, investment in China by Western firms and unionisation will be briefly examined. Meantime enjoy your Chinese part-owned pint of Guinness!

Posted in: EconomicsInvestment

Tagged with: state companieschina

Paul Sweeney     @paulsweeneyman

paul-sweeney

Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He was a President of the Statistical and Social Enquiry Society of Ireland, former member of the Economic Committee of the ETUC, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.


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