Chinese Companies Continue Global Expansion In Resources Sector

In this undated picture supplied by Rio Tinto, iron ore mining is seen in Pibara region of Western AustraliaDespite the global financial crisis, Chinese state-owned companiescontinue buying assets overseas, especially in the energy and resourceindustries. The trend is expected to continue into the next decade.
 
FromAustralia to Iraq, Chinese state companies are gobbling up fuel andcommodities around the world. About 90 percent of Chinese overseasinvestments in the first half of the year went to the energy and basicmaterials sector. Last year, China mergers and acquisitions dealstotaled nearly $24 billion.
 
Jing Ulrich is chairwoman of China equities and commodities at the investment bank JP Morgan.
 
"Ithink the Chinese government strategy is to gradually acquire moreresource-based assets because China is a resource poor country but itis cash rich," she said. "To fuel China's future development, you needa lot of copper, a lot of iron ore, a lot of other metals, includinggold. So I do believe that China is on a path to overseas acquisitions."
 
Chinais expected to increase its acquisitions in the mining and oilindustries by 50 percent this year to take advantage of cheaper pricesbecause of the financial crisis.
 
China has $2 trillion worth offoreign currency reserves. Andrew Lam, a partner at Grant Thornton, afinancial advisory company in Hong Kong, says this year's massiveeconomic stimulus spending program has added more ammunition toambitious Chinese companies.
 
"Through the big banks, thegovernment is pumping a lot of money into the economy. And this moneyis actually working its way into increased spending," he said.
 
Chinais the world's largest buyer of iron ore and the biggest consumer ofsteel. To encourage overseas investment, the government has streamlinedthe approval process, encouraged financing and allowed companies toretain foreign currency income.
 
The biggest deal so far thisyear is Sinopec's $7 billion acquisition in August of Addax Petroleum,which operates an oil field in Iraq's Kurdistan region.
 
Chinesestate-owned companies have not been shy in courting the biggestcompanies in the world. But these attempts have revealed theirlimitations despite their deep pockets.

Chinalco's $19.5 billionoffer for a stake in one of the world's largest miners, Rio Tinto, wasrejected. And many in Australia, Rio Tinto's home country, say that ledto the arrests of four Rio Tinto executives in Shanghai for allegedbribery and commercial espionage.
 
The Rio Tinto espionagecase highlights the political complications arising from dealings withstate-owned companies. David Li, economics professor at TsinghuaUniversity in Beijing, says Chinese companies are entering new terrain.
 
"China'sdemand for resources is through the purchases of our state-ownedenterprises because many of the resource-using enterprises arestate-owned enterprises. And these state-owned enterprises are innegotiations with companies with strong government support. So this isa new challenge," he said.
 
China has also been aggressive inpushing for changes in global commodity pricing. Earlier this year,China pressed the world's biggest iron ore suppliers to cut prices.
 
Li says China's hunger for resources has massive implications for the rest of the world, beyond mere business deals.
 
"China'sdemand for these resources potentially will also help resource richcountries like Mongolia and Nigeria, to upgrade their economicstructure. We are able to reach a win-win solution not only for China,but also for resource rich countries and the rest of the world," hesaid.
 
Mongolia's mining minister, F. Zorgit, says such investments have the potential to radically change his country's future.
 
"Togive you an example, one mining project can quadruple the country's GDP(gross domestic product). The country's budget revenue can depend on asingle company so much that the politics and economic life can bechanged by that company," said Zorgit.
 
In August, Mongolia'sparliament passed a law opening up the mining sector to foreigners. Thecountry is rich in copper, gold, uranium and coal - a fuel China needs.
 
Marketexperts say Chinese strategic acquisitions will continue over the nextfive to 10 years. Chinalco's chairman recently said Chinese companiesface huge challenges in these overseas forays, but they are learninglessons every time.