State-owned Chinese groups’ acquisitions in Europe raise concern

Logo of China National Checmical Corporation (ChemChina), which has taken over Italian tyre maker Pirelli Keystone

China's richest man says his country's state-owned enterprises are short-termist and lack international management standards. Nevertheless, SoEs dominated a surge of Chinese investment into Europe last year, raising a series of questions over the suitability of China Inc as an owner of European corporate assets.

Self-made billionaire Wang Jianlin, chairman of Dalian Wanda Group and one of China’s biggest outward investors, criticised SoEs for being slow and lacking long-term overseas expansion strategies.

“The bosses of state-owned enterprises are unable to set long-term goals because their position will be replaced in two or three years,” Mr Wang told an audience at Oxford University last week. “Moreover, state-owned enterprises do not have international standards for their management systems, and have long cycles for their approval process,” he added.

He cited an example. When bidding for a real estate project in London, Mr Wang said, he was given one week to complete or the asset would go up for auction, resulting in a higher price.

“I made the quick decision to go for it, signed the agreement and paid the cash in three days,” he said. “In a similar situation, it would have been very difficult for a state-owned enterprise to make that swift decision.”

Record investment

His warning comes as new data show SoEs accounted for 70 per cent of a record €20 billion (CHF22 billion) invested by Chinese companies in the EU last year, up from 62 per cent of €14 billion invested in 2014, according to a report from the Mercator Institute for China Studies (Merics), a German think-tank, and the Rhodium Group, a New York-based consultancy.

Much of the 44 per cent jump in overall Chinese investment into Europe came from a few big ticket acquisitions by SoEs, including ChemChina’s €7.3bn takeover of Italian tyre group Pirelli and Shanghai Jin Jiang’s acquisition of Europe’s second-largest hotel group, Louvre Hotels, for a reported €1.3 billion.

Concerns surrounding SoE outward acquisitions take several forms. One is simply that the financial performance of China’s top 106 SoEs, or those owned by the State-owned Assets Supervision and Administration Commission (SASAC), deteriorated in the first 11 months of last year, with profits falling 10.4 per cent, the ministry of finance said, without specifying if it was referring to net or pre-tax profits.

A Chinese official, who declined to be identified, said that SASAC is now intensifying efforts to ensure that SoEs acquiring companies overseas engage only with “good projects” which make money. This stricture was making the organisation increasingly bureaucratic, with approvals to buy foreign assets and increase investments in them often taking several months.

Kjeld Erik Brødsgaard, a professor at the Copenhagen Business School, said that SASAC’s urging for investments into lucrative projects was nothing new. “But now it seems that SASAC is under pressure to make sure that this is what is going to happen,” Prof Brødsgaard said.

Fairness

Aside from the issue of bureaucracy, analysts said that SoE purchases of European corporate assets also raised questions of fairness. SoEs are often highly indebted but nevertheless can use their government links to raise finance for overseas acquisitions on concessionary terms, analysts said.

For instance, ChemChina is a highly leveraged company with total debts of 9.5 times its annual earnings before interest, tax, depreciation and amortisation (ebitda). But it is unlikely to face difficulty in funding the $44 billion it needs to buy Syngenta, a Swiss agrichemical giant.

“China’s new policy-driven financing push has the potential to undermine EU integrity and geoeconomic interests in its neighbourhood,” wrote Thilo Hanemann and Mikko Huotari in the Merics-Rhodium joint report.

“It also challenges Europe’s longstanding goal of disciplining subsidies and state aid to ensure private capital is not being crowded out by state-related actors not operating on market principles,” Mr Hanemann and Mr Huotari added.

In addition, the asymmetry of bilateral market access is another European concern. “Chinese interest is growing particularly fast in sectors that remain restricted to foreign investors back in China, amplifying the political salience of unequal market access,” according to Mr Hanemann and Mr Huotari.

An increase in Chinese acquisitions of financial services firms last year was a particular concern because the sector remains largely off limits to European acquirers in China. Restrictions also limit the extent to which foreign companies can acquire assets in several other sectors, including automotive, agriculture and energy. All of these drew Chinese interest in Europe.

Copyright The Financial Times Limited 2016