Friday, June 08, 2007

Acquisitions by emerging market state entities

Asian governments now sit on enormous reserves- $3300 bn. Middle eastern state-run funds are said to have $2000 bn. In Russia and China, state-run companies can raise huge amounts for acquisitions. That does put state-run emerging market entities in a position to own big chunks of equity in western markets. China's investment of $3 bn in private equity fund Blackstone is a harbinger of things to come.

How do western governments cope with this? Gerard Lyons, chief economist of Standard Chartered Bank, has an article on this in FT.Some of the attempted acquisitions have run into huge controversies.

Not all countries on the receiving end of these flows are receptive to the idea. The Thai authorities reacted badly to Temasek of Singapore’s purchase of a telecommunications stake in their country. Dubai Ports World had to abandon its attempt to buy P&O’s US ports after it prompted a national security debate in the US Congress. The bid by China’s CNOOC for Unocal was also blocked in the US. There is no reason to expect this hostility to change with the 2008 US presidential elections.

One controversial area is the use of state funds to buy strategic energy assets. The clearest example is China’s courting of commodity producers, especially in Africa. There has been a backlash to this in some African countries, but their concerns may not last long given the need to attract foreign direct investment.

Strategic assets will always remain an area of controversy but for the rest the way out, Lyons contends, is to have the WTO frame the ground rules. This would mean that emerging markets must open their own markets if they want free access to others'.

I doubt that the WTO will be able to make much headway in this area. Foreign acquisitions will be more contentious in the emerging makets themselves than in the west- in India, moves are already under way to ensure that FDI is consistent with security requirements. I can't see India
giving Chinese companies the nod to acquire domestic energy or telecom companies. The same goes for China. Will China allow SBI or ICICI Bank to take over any of its banks?

Greenfield investments are possible. So are small, minority stakes and partnerships with local ventures. But acquisitions, especially of state-owned entities, will remain a no-no amongst emerging markets.

At best, emerging markets may open their economies a little more to firms from the industrial economies. But, in the near future, the targets available will be largely in the private sector.


Krishnan said...

This schizoid attitude in foreign trade and currency flows and markets and all that that seems to be prevalent everywhere is strange. In the US there was this outcry when China wanted to invest in Unocal and again when Dubai Ports international swaddled in the economic waters and were scolded as it were ... Perhaps there are reasons in few, specific cases where there may be clear national interest in letting certain industries or sectors not be controlled by "foreign" companies/governments - yet more of it seems to be driven by considerations other than any clear national interest. When Lenovo took over the PC making part of IBM, there were some grumblings - but it happened.

I'll stick to the US perspective. So, the politicians here do not want China to have too much say in companies/etc in the US - yet feel they can demand that China revalue their currency vis-a-vis the dollar - If over night, the Chinese revalue their currency, the "dollar" value of their holdings will increase if they can sell their currency at those prices (given the Chinese economy, it may yet be possible to do so) - thus, in the short term the US will "enrich" the Chinese - so what are they allowed to do with their money? "Invest" - yet not anywhere that they want to ... So, we tell the Chinese what to do with their currency and yet tell them how they can spend it ... Ah, makes sense to some.

In the 80's/90's when the Japanese were buying real estate with their dollars, there was an outcry also as to how they were pushing up prices ... those dollars were earned in part/largely from their more efficient cars and taking market share from Detroit ... thus the public bought Japanese cars - yet demanded some control on how that money ought to be spent ... The american consumer is buying all things Chinese - yet rail against WalMart or any such company that contracts with Chinese companies - yet turn around and rail against Chinese money when it comes back to the US ...

The Japanese were thrashing Detroit (GM/Ford/Chrysler) when the Yen was far cheaper (200+ yean to the dollar) - today they continue to beat GM/Ford ... Yet I can iamgine the outcry if Toyota were to buy GM (which they can several times over and still have money to spend) ... I guess like most countries, the US wants to have it's cake and eat it too.

The current schizoid attitude with respect to illegal immigrants in the US is similar - 12 million people are apparently illegal in the US - and if one pays attention to some, you would think they are sitting around on the public dole doing nothing ... Yet the reality is that if these immigrants were to stop coming and the US were to ask the 12 million to go "home", the US economy will collapse. So, do we want them or not? Do we want a functioning economy or not? The answer is - We want their labor but are not willing to accept the reality of their economic worth and demagogues keep yelling and screaming and nothing happens.

Free flow of ideas, resources amd capital - human and otherwise is what has allowed much of the world's economies to develop the way they have.

Krishnan said...

I wanted to add this point. In this "Flat World Economy" the world's poorest nations have an opportunity - they can open themselves up to foreign investment in such a way as to leapfrog others that seem determined to protect this/that/other in the name of whatever they say they want to protect ... True, capitalist nations/money lenders/entrepreneurs may jump at unfettered access to such opportunities and may even enrich themselves significantly - but the fall out (as it were) on the surroundings and the country and that poor economy as a whole can be significant ... Clearly such countries (whoever they may be) need to demonstrate political stability to guarantee that such investments (if they are made) will not be expropriated arbitrarily as Venezuela is starting to do. The money that used to flow into Venezuela will surely be looking for good homes soon as Chavez starts throwing more tantrums and demonstrating his madness more and more.