China Moves Outward With Its Bankers At Its Side
China outbound mergers and acquisitions have come a long way since Lenovo purchased IBM’s laptop business in 2004. While the jury still may be out on that deal, yes even six years later, there is no doubt that China’s outward M&A deals have increased dramatically in recent years both in dollar terms and the number of deals closed. As a percentage of total M&A activity, outward bound deals are catching up, with one estimate showing an increase from 8.5% in 2007 to nearly 25% in the first three quarters of 2009. After a banner year in 2009, when Chinese firms found themselves positioned well compared to their cash-strapped counterparts overseas during the recession, the prospects for 2010 are rosy.
However, ever-increasing numbers are only part of the story. Financing options have also come a long way, with the Chinese government doing its part to ensure that the transactions important to its economic development and foreign policies can be facilitated by Chinese financial institutions.
This financing story should not be painted with the same brush as the current narrative regarding the “re-nationalization” of some Chinese industries to the detriment of foreign investors. In contrast, the outward M&A financing framework can be characterized by its (comparative) liberalization, the additional options made available as the sector matures and the modernization of the regulatory sector as it catches up to the needs of industry. (My recent China Hearsay post on China’s increasing willingness to work with the World Bank/IFC on projects discusses a minor example of greater flexibility.)
Up to now, financing of China outbound deals have been dominated by cash-rich players, including private equity and sovereign wealth giants in addition to State-owned Enterprises. But while China Investment Corporation (CIC), China Development Bank and State-owned energy companies will continue to be big players, other enterprises will be making outward moves using diversified financing.
One of the most important regulatory steps for domestic M&A financing took place in late 2009, when China’s banking watchdog put into place an approval regime:
The China Banking Regulatory Commission (CBRC) issued the “Guidelines for Risk Management of Merger and Acquisition Loans by Commercial Banks” (Guidelines) on December 9, 2008. They went into effect that same day. The Guidelines allow qualified Chinese commercial banks to provide commercial loans to acquirers to finance merger and acquisition (M&A) deals. Until issuance of the Guidelines, financial institutions had been prohibited from directly financing acquisitions. Issuance of the Guidelines marks a major step forward from past prohibitions on leveraged acquisitions.
The M&A transactions covered by the Guidelines include equity acquisitions, subscriptions for new equity issuances, asset acquisitions, assumptions of liabilities and other transactions which enable one entity to merge with or to obtain control of another entity (Article 3 par. 1). Acquisitions can be effected through existing operating companies or special purpose vehicles (Article 3 par. 2). Loans may be used for cross-border transactions (Article 8 par. 2).
Granted, the CBRC rules give the government a great deal of discretion over specific deals, a characterization one could also make with respect to the strict oversight regime of the 2006 M&A Law and the 2008 Anti-Monopoly Law. This approach may yet prove to be a hindrance in the future, particularly if proposed deals are seen as objectionable or somehow run counter to stated government policy. A recent example would be the Tengzhong acquisition of Hummer, which some suggest was scuttled, at least in part, because it would have reflected poorly on China’s efforts on the environmental front.
The opportunities are out there, Chinese enterprises are willing buyers, and there has been movement on the regulatory front. What about the banks?
In addition to their own ramped-up activities, which are projected to continue in 2010, Chinese banks appear ready to follow their clients to new markets and position themselves to capture a greater share of inward deals as well:
Ma Weihua, president and chief executive officer of China Merchants Bank (CMB), said he wanted to see Chinese banks elevate their level of globalization in the context of expedited overseas expansion of Chinese companies during his bank’s recent road show in the United States. He said CMB would pursue this process ambitiously but cautiously.
[ . . .]
The branch is attaching increasing importance to the loan business for Chinese companies during their overseas merger and acquisition activities. It just completed a big deal for a Chinese State-owned conglomerate but declined to reveal its name.
“The most fundamental motive to globalize our bank is to support Chinese companies’ overseas growth and to provide the same quality service for foreign companies as well when they come to China,” Ma said.
If that last sentence does not strike a small measure of fear into the hearts of foreign financial institutions, I would be surprised. Similarly, as enterprises move outward and are followed by their bankers, it’s only a matter of time before their lawyers, accountants and other service providers follow suit.
As CMB’s Ma summed it up: “”Our customers have now made a move out of the country. Shouldn’t we follow?”
(off topic but thought you could use)
Latest Directives from the Ministry of Truth: April 22 – April 30, 2010
The Chinese blog Ministry of Truth has compiled a number of recent orders issued by various propaganda departments over news reporting of recent events. Translated by CDT:
April 30th, 2010
All websites: News regarding killings of students should all be deleted or obscured. Related information should not appear on front pages. Forums and blogs are not to discuss it! This order must be fully executed.
Directive: No longer report “The Deputy General Consul of the PRC Consulate in Houston Yu Boren was arrested by Local Police“; don’t hype the “South Korean Cheonan Incident,” avoiding elements relating to us; keep low-key the handling of the RMB exchange rate; do not report “adjusting exchange rate under US pressure.”
Urgent order:
1. Regarding the campus killing and violence incidents, in order to prevent public panic and some extremists from imitating after large-scale propagation [the news], no reporting or commentary in any form for any of those incidents. For reports already published about Fujian and Leizhou, all reports should be deleted on the Internet.
2. In reporting the central committee leaders coming to the World Expo, all media need to use reports from Xinhua or other central committee media; no other media should do its own reporting; no following or stopping leaders for interviews allowed.
3. Media should not follow the western media in criticizing the World Expo, such as over its excessive costs, that it’s causing housing prices to rise etc…. About the copyrights-related issue, only report according to authorized departments’ explanations.
4, For the opening ceremony, strictly execute according to the plan issued ahead of the event. Strictly forbid any dissenting voices
questioning [the event]. If there is a sudden event, do not report on your own; only report according to unified requirements.
April 30th, 2010
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April 29th, 2010
For the story on the stabbings at the kindergarten in Taixing, only use copy from the Central Party and Jiangsu Party media. Clamp down on commentaries.
The Provincial Propaganda Bureau of Guangdong has issued a prohibition to media outlets in the province regarding the case of killings in Leizhou: Do not send reporters for interviews. Do not make comments or hyperlinks. Do not put it on the highlights section or on the front page. Do not give it a large title. Do not attach photos.
April 29th, 2010
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April 28th, 2010
It is forbidden to hype content related to the draft revision of the State Secrets Law, which clarifies for the Internet the collaboration required in investigations of leaked state secrets. Close news comment spaces, and related articles on forum postings are all to be deleted.
State Secrets Law, Draft Revision, Clause #26: When public safety agencies, national security agencies, and the National Bureau for State Secret Administration and Control, following legal regulations, open investigations into cases of leaked or stolen secrets, Internet and telecommunications providers and service companies will provide [these agencies with] their technology support and daily records.
Be advised: Replace the story titled “Newsroom Director and Editor-in-Chief at Guangdong Television Jumps to His Death; Financial Problems Suspected” with the following: “Assistant Newsroom Director and Editor-in-Chief at Guangdong Television Jumps to His Death; Tentatively Confirmed as Suicide; Perhaps Caused by Anxiety Disorder.”
April 28th, 2010
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April 26th, 2010
Delete content related to a creature called the “chalk fox.”
Background information: “‘The chalk fox.’ This fox steals blackboards for its livelihood. It causes problems because all blackboards scrawled with chalk taken by this fox cannot be used as blackboards anymore. Natural enemy: an eraser. Lethal weapon: chalk. Victim:schoolchildren. Pet phrase: “The new fox will come.” Temperament: anxious. It specifically worries about the Chalk fox of next term and its own work being erased. [Editor’s note: This is a reference to a visit by Hu Jintao to a local school in the area of Qinghai devastated by the recent earthquake, during which he wrote a message to students and teachers on a chalkboard. The school later saved the chalkboard as a memento.]
In order to prevent fallout, Writers Associations at the provincial and city level are hereby ordered to temporarily cease accepting the resignation of members, and from issuing related opinions. (Background: Author Zheng Yuanjie announced that he is resigning from the Chinese Writers Association)
From now on, the word “Google,” “guge,” and related words cannot appear in published materials, nor can there be books designed with Google technology.
Do not hype the story “Zheng Yuanjie Resigns From the Chinese Writers Association.”
In anticipation of heated news about the Shanghai World expo, screen out all negative reports.
April 26th, 2010
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April 25th, 2010
Regarding the debate between [Taiwanese politicians] Ma Ying-jeou and Tsai Ing-wen, do not overly quote what Tsai Ing-wen says.
1. Cool down disaster relief reports, speedily heat up Shanghai World Expo reports.
2. Give careful reports in Yushu regarding collapsed earthen homes, problems with the quality of school structures, and problems with antiseptic solutions for preventing disease.
April 25th, 2010
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April 23rd, 2010
In keeping with the idea of saving the excitement until after the opening ceremonies, during the rehearsal period do not issue reports without permission regarding the content of World Expo pavilions and exhibitions. With the exception of designated media outlets, all other media outlets are to use copy circulated from the Xinhua News Agency.
Regarding tonight’s announcement of the change in leadership in Xinjiang, at the appointed time close news comment spaces, and at the same time pay attention to the nature of posts on online forums. If there are personal attacks, malicious criticisms, etc., delete them. Please execute.
April 23rd, 2010
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April 22nd, 2010
The Central Propaganda Bureau has issued an order not to publish Yan Lieshan’s “The Netizen slander case: a premise for a non-established judgment.”
April 22nd, 2010
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Read more about the “Ministry of Truth” via CDT:
In China, several political bodies are in charge of Internet content control. At the highest level, there is the Central Propaganda Department, which ensures that media and cultural content follows the official line as mandated by the CCP. Then there is the State Council Information Office (SCIO), which has established “Internet Affairs Bureau” to oversee all Websites that publish news, including the official sites of news organizations as well as independent sites that post news content.
This “Internet Affairs Bureau,” sent out very specific instructions to all large news websites daily, and often multiple times per day. Those instructions do not always mean that related contents are completely banned online, but they instruct websites to highlight or suppress certain type of opinions or information in a very detailed manner.
Chinese journalists and bloggers often refer to those instructions, as well as other type of censorship orders to media and websites, as “Directives from the Ministry of Truth.” The Ministry of Truth (or Minitrue, in Newspeak) is one of the four ministries that govern Oceania in George Orwell’s novel Nineteen Eighty-Four. In the Chinese blogosphere, it is the online lingo for the Central Propaganda Department and generally speaking, all other subordinate propaganda agencies including Internet supervision departments.
Today, it’s been said that news does not break, it tweets. For the officials in the the Ministry of Truth, the news is that their supposedly confidential instructions get tweeted as well.
Yes, that’s been percolating on the Interwebs today. They forgot to send it to me in time, I guess. Ooops.