China Inc cannot buy foreign companies fast enough and the yuan’s trajectory helps explain why.
“A lot of people in China are saying the yuan is going to weaken against the [US] dollar, so they take it out and put money into US dollar investments,” Templeton Emerging Markets Group chairman Mark Mobius said in an interview last week, forecasting “mild” depreciation of the currency. “There’s no question that Chinese companies want to become world-class, which is why acquisitions make a lot of sense.”
The value of Chinese firms’ offshore acquisitions reached US$97.4 billion this year, already 80 percent of last year’s record, data compiled by Bloomberg showed.
Even as Chinese authorities seek to stem a mass exodus of capital, Chinese President Xi Jinping’s (習近平) government is encouraging foreign dealmaking to win know-how and global market share.
“The yuan’s moves do act as a driver for Chinese acquirers,” UBS Group AG head of Asian mergers and acquisitions Samson Lo said. “That’s why they’re moving forward now, because they’re concerned about the longer term.”
Citigroup Inc forecasts the yuan will weaken to 6.97 by the end of next year.
For Chinese companies worried about devaluation, “the time to go global is right now,” Peking University Guanghua School of Management associate professor of finance Zhao Longkai (趙龍凱) said.
“Chinese firms will try to hedge the currency, and so it makes sense to diversify some assets abroad,” Zhao said.
Cash held on Chinese corporate balance sheets increased 8 percent to US$3.78 trillion in the past two years, according to Bloomberg-compiled data, and China-listed companies trade at a 7.7 percent premium to peers in other emerging markets.
“Assets are cheap abroad, borrowing costs are low globally and expectations for further renminbi depreciation are probably encouraging more companies to buy foreign assets,” Invesco Hong Kong Ltd (景順投資) chief investment officer of Asia-Pacific fixed income Ken Hu (胡嘉林) said.
Still, “the impact on capital outflows will be much smaller than the headline number shows” as foreign deals are often funded overseas, he added.
Even with some of the money coming from outside the nation’s borders, China Inc’s shopping spree poses a dilemma for authorities trying to stem capital outflows while also making progress on a long-term goal of allowing businesses to go global and become international champions.
“The Chinese government will probably be reluctant to see too much of this happening because the amount is big, in billions of dollars,” Mobius said. “There’s a dilemma as, on one hand, they want companies to become world-class and, on the other hand, they don’t want to see huge amounts of money flowing out of the country.”
Mobius echoed Hu’s view, saying almost half of the investments would be funded overseas.
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