beyondbrics

China may have once have had a reputation for caution in its foreign corporate forays but it’s no longer scared of marching into difficult economic or political territory.

Any doubts on this score are dispelled by the news that the Beijing government has authorised Sinochem, the state chemicals group, to work on plans for intervening in BHP Billiton’s $39bn effort to take over Canada’s PotashCorp.

China has not declared its intentions on a possible counterbid. But its ambitions are obvious – as the world’s biggest potash importer it wants a say in the fate of the world’s largest producer. And Beijing will not be put off by its past reverses on the bruising battlefield of international mergers and acquisitions.

China first made big headlines in overseas m&a in 2004 with Lenovo’s successful $1.75bn acquisition of IBM’s personal computer business. But it ran into trouble when CNOOC, the state oil company’s, failed $18.5bn hostile bid for Unocoal, the US energy group, after American politicians portrayed the move as a strategic threat.

Last year, Chinalco, the Chinese state metals group, lost out in an $19.5bn move to increase its investment in Rio Tinto, the mining group, where it is the largest shareholder. Other shareholders threw out the management-backed deal as too generous to Chinalco. But the Australian government also raised questions about the plan’s strategic implications.

Rio and Chinalco have quickly moved on, with Chalco, Chinalco’s listed subsidiary, this summer buying a 44.6 per cent stake in a Rio-controlled iron ore project in Guinea for $1.35bn.

Sinochem has yet to execute a big international deal having failed last year to complete a bid for Australia’s Nufarm, an agricultural chemicals producer. Sinochem cut its A$2.8bn offer by 8 per cent and was trumped by Japan’s Sumitomo, which went on to buy a 20 per cent stake in Nufarm.

It is early days in the PotashCorp story, with the Beijing government asking Sinochem “to take an interest” in the Canadian fertiliser company. A full bid would cost double Chinalco’s abortive Rio investment plan. But the purchase of a 15 per cent blocking stake would be priced at around $8bn.

Sinochem has access to China’s huge financial resources, including possible soft loans from Chinese state banks and/or support from China Investment Corp, the sovereign wealth fund. China could even secure backing from institutions in Canada, where there is considerable opposition to BHP’s hostile bid.

Chinese officials are acutely aware of the complex political, economic and commercial context in which chunky international investments are made. Whether by coincidence or not, China Daily today carries an opinion piece titled “Ventures abroad facing a bumpy road.”

Zhu Xiaoming, executive president and professor of management at the China Europe International Business School, and Pedro Nueno the president and professor of entrepreneurship, write:

As they venture abroad on what will surely be a journey full of twists and turns, Chinese companies will not only face global competition and external pressure, but they will also have to significantly improve their management skills at the internal level.

They add:

While many Chinese companies are agile and have lofty ambitions, some of them lack the efficient management systems and processes needed to implement their goals. China’s imperfect institutional environment and rapidly changing marketplace entice many domestic companies to rush to take advantage of “opportunities” without careful analysis.

A quick glance at the latest FDI figures, and it becomes clear that the challenges will only grow bigger. The commerce ministry said on Monday that China’s outbound investments this year were likely to reach $60bn, up from $56.5 billion in 2009, with further increases likely in coming years.

Meanwhile, despite the misgivings voiced by some leading western multinationals, foreign investment into China is likely to pass $100bn this year for the first time. Non-financial FDI hit a record $92.4bn in 2008 but fell to $90 billion in 2009 after the global financial crisis.While the totals include significant amounts of Chinese investment round-tripping via Hong Kong, the trend is unmistakeably upward.

Foreign investors are upbeat about China’s economic outlook and Beijing’s efforts to improve the investment environment have boosted their confidence, according to the commerce ministry, the official Xinhua news agency reported. China attracted $58.4 bn in FDI in the first seven months of the year, up 20.7 percent from the same period of 2009.

So, for the moment, inbound investment continues to far exceed outbound. But with a a $40bn-plus bid for PotashCorp, the numbers would more or less balance out…