China Petroleum (PTR) is buying 45.5% of Singapore Petroleum for just over $1 billion and will probably move to purchase the balance of the company. China recently proposed a deal to lend $10 billion to Brazilian oil giant Petrobras to help it develop deep sea crude deposits. In exchange, the world's most populous nation has negotiated getting a steady flow of oil from Brazil at market prices.
Chinese mineral firm Chinalco has bought into metals giant Rio Tinto (RTP) which raised concerns with the U.S. and Australian governments about whether they want a foreign nation to have such a large stake in a company which supplies commodities to major corporations all over the world. (See pictures of China's rebuilding efforts.)
Now that China's state-controlled companies have begun a shopping spree triggered by their access to cash and an eye to assets in other parts of the world beaten down by the recession, the fight over whether some assets are "too big to be bought" is heating up. There have been rumors that Chinese car companies might bid for auto brands in the U.S. and Europe. China's sovereign fund may be a bidder for AIG's (AIG) huge airplane lease division ILFC.
China's largest companies are beginning to take center stage as the and most asset-rich corporations in the world. The market cap of PetroChina (PTR) recently passed Exxon Mobil (XOM) making it the most valuable company traded on any stock exchange. That gives it the option of using cash or stock to acquire assets in the West and Japan.PetroChina can also tap the Chinese treasury for cash.
Congress and legislatures in the U.K., Europe, and Japan are faced with whether or not to let key companies in important industries pass into Chines hands. Last year, the Congress effectively blocked a deal for Chinese electronics firm Huawei Technologies to buy 3Com. The reasoning was the U.S. did not want critical telecom equipment intellectual property to be easily accessible to China. (See pictures of the global financial crisis.)
In the U.S., the question of whether some assets are too important to allow China to buy puts the interests of Congress against the interests of shareholders. PetroChina is paying a 24% premium to buy its new stake in Singapore Petroleum. If a Chinese firm offered a similar premium to buy a US-based energy or refining operation, would Congress block the deal? If the 3Com transaction is any indication, potential shareholder profits would be trumped by a government decision that it does not want China to have control of assets that are part of the fabric of American economic and business interests.
China may have access to tremendous amounts of capital to shop for assets outside the country, but it may have extremely limited opportunities to spend it.
Douglas A. McIntyre
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