Reuters Analysis: China Sees Canada Potash

China may have a prudent reputation for acquiring overseas companies for a time, but China is no longer afraid of advancing to tough economic or political sites.

At this point, any doubt has been dispelled by the news: The Chinese government has let the state-owned Sinochem plan to intervene in BHP Billiton's $39 billion acquisition of Potash Corp.

China has not yet announced whether it intends to issue a competitive offer. But its ambition is obvious - as the world's largest potash importer, it wants to have a say in the fate of the world's largest potash producer. Beijing, on the other hand, will not be intimidated by the past setbacks on the arduous international M&A battlefield.

China made headlines for overseas acquisitions for the first time. It was Lenovo's acquisition of IBM's personal computer business for $1.75 billion in 2004. But since then, China’s efforts have encountered obstacles. The state-owned CNOOC (US$18.5 billion) hostile bid for the US energy group Unocoal has failed because US politicians have characterized the deal as a strategy**.

Last year, the state-owned Chinalco had planned to invest US$19.5 billion to increase its investment in mining group Rio Tinto (Chinalco is Rio's largest shareholder) but ended in failure. Rio Tinto's other shareholders vetoed this deal, which was supported by management, on the grounds that it was too generous with Chinalco. However, the Australian government has also questioned the strategic impact of the relevant plans.

Rio Tinto and Chinalco quickly got out of the shadow of the deal and continued to move forward. This summer, Chalco, a listed subsidiary of Chinalco Group, spent US$1.35 billion to acquire a 44.6% stake in a Nigerian iron ore project of Rio Tinto.

Sinochem has not yet completed a major international transaction. The group failed to complete the bid for Australia's agrochemical producer Nufarm last year. Sinochem Group reduced its A$2.8 billion offer by 8%. The result was Sumitomo, Japan’s successor, and Sumitomo’s acquisition of a 20% stake in Nufarm.

The bidding war surrounding Canada's potash fertilizer is still in its early stages. The Chinese government has allowed Sinochem to “hold equity” in this Canadian fertilizer company. The price for full bidding will be twice as much as Chinalco’s investment plan for Rio Tinto's abortion. However, the price for buying 15% of the blocked stock will be about 8 billion US dollars.

Sinochem Group can obtain China's huge financial resources, including the possible softening of China's state-owned banks and/or the support of sovereign wealthy China Investment Corporation (CIC). China may even win support from various agencies in Canada. The local hostile opposition to BHP Billiton is quite opposed.

CEIBS Executive Dean, Professor of Management Zhu Xiaoming, Dean and Pedro Nueno, Professor of Entrepreneurship, wrote in the book “Overseas Investment Faces Rough Roads”:

“Chinese companies’ overseas expansion is bound to be a bumpy journey. In the process, Chinese companies will not only face global competition and external pressure, but must also significantly improve their management skills internally.”

They added: “Although many Chinese companies are quite agile and have ambitious ambitions, some of them lack effective management systems and procedures to achieve their goals. China’s incomplete institutional environment and rapidly changing markets have spurred many Domestic companies have used their 'opportunities' without careful analysis."

Looking at the latest foreign direct investment (FDI) data will understand that the challenges in this area will only become even greater. The Chinese Ministry of Commerce said on Monday that China’s foreign investment this year may reach 60 billion U.S. dollars, which is higher than the 56.5 billion U.S. dollars in 2009, and that it may further increase in the next few years.

At the same time, although some leading Western multinational companies have expressed doubts, foreign investment into China this year may exceed 100 billion US dollars for the first time. Non-financial foreign direct investment reached a peak of 92.4 billion U.S. dollars in 2008, but fell to 90 billion U.S. dollars in 2009 after the outbreak of the global financial crisis. Although the total in this area includes a large number of Chinese investments that have flown through Hong Kong, the trend is undoubtedly upward.

According to the official Xinhua News Agency, the Chinese Ministry of Commerce stated that foreign investors are optimistic about China’s economic prospects, and Beijing’s efforts to improve the investment environment have increased their confidence. In the first seven months of this year, China has attracted 58.4 billion U.S. dollars in foreign direct investment, an increase of 20.7% over the same period in 2009.

Therefore, for the moment, foreign investment continues to far exceed China’s foreign investment. However, if the Chinese side launches a bid of more than $40 billion for Canadian potash, that will allow China's foreign investment this year to basically catch up with foreign investment.