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Himalayan Crossings: Explaining the Rise of China and India

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Archive for January, 2008

Rumors About China and BHP: Will China Buy Into BHP?

Thursday, January 31st, 2008

Reports are circulating now that at the Davos meeting last week there were rumors that China would help BJP in its bid for Rio Tinto, rather than blocking the deal. This has the ring of possibility to me and is akin to the other commodity and financial investments made by Chinese sovereign wealth actors in the last two years.

Commodities Demand in India: A Perspective on India's Medium-Term Macroeconomic and Political Outlook

Friday, January 25th, 2008

  • The main drivers of growth in India are:

1) A steadily increasing population;

2) Strong domestic firms (some of the best in the developing world);

3) A large and expanding industrial sector;

4) In the longer-term, transition from a largely agrarian-rural economy and society will drive growth, even while it may cause periodic social disruption;

5) India’s financial sector while still complicated by some risk, opacity, and barriers to access is arguably one of the best in the developing world, particularly in the area of securities finance. (This makes investment in India, relative to other developing countries, an attractive proposition if the investment requires access to local capital markets.)

  • Three major concerns loom large on the near- and medium-term horizon of India’s broad political-economy.

1) Indian economic performance is still strongly shaped by the agricultural sector. Today, the best predictor of annual growth remains the monsoon. Despite a steady urbanization trend, 70% of the population remains rural. Domestic demand is heavily dependent on rain-irrigated agriculture. In the medium-term, this can be treated as an exogenous and fixed factor in all forecasting.

2) How will India surmount the federal and parliamentary obstacles that have produced crippling bottlenecks in the development of countrywide infrastructure and low-friction national markets? The current conditions of transport and logistics in the country reflect both the peril and promise of commodity plays in India. On the one hand, the poor quality of that infrastructure limits the flow and use of commodities. On the other hand, potential resolution of these bottlenecks will provide opportunities both in the construction of that new infrastructure stock and in its later use.

3) Without exception my interlocutors in government and business identify labor absorption as a key pending concern. How will Indian manufacturing expand to employ the 17 million semi-skilled workers entering the labor-force in the next five years? To the extent that the government will face a political imperative to provide a development policy for manufacturing, there is likely to be a demand for the commodities needed to construct this new capacity and, later, as inputs for the final goods.

  • The consensus view among the mainstream of macroeconomic and political science analysis on India is clear in its assertion that in matters of market growth and economic reform that India is and will remain “middling performer” among the world’s emerging market locations. China, Brazil, South Africa, and Eastern Europe will likely out-perform India in these areas for some time to come. Assessments of broad growth place a likely floor at floor of 4.5 % and a ceiling of 9%. Very broad variance across sectors lies behind this “middling performer” average.
  • The chief limits and concerns for commodity-related investments in India are two:

1) Government limits on direct and portfolio investments in both private and state-owned commodity firms.

2) Competition and anti-foreign lobbying from well-positioned domestic private conglomerates. In the near-term, investors would be well advised to collaborate with state agencies and reliable private partners.

  • At this time, it is not possible to draw broad conclusions about mergers and acquisitions or direct investment in commodities-related firms. Too few reference points and comparable transactions exist. The volume of M&A activity in this area is thin and policy preferences among in the ensemble of key political actors are difficult to decipher. Case-by-case evaluation of completed transactions, supplemented by an in-depth analysis of policy scenarios would be necessary for parties contemplating commodity-related deals in the Indian market.
  • In petrochemicals (and to a lesser extent in other commodities) India has been outmaneuvered by China in securing providers. With its deep pockets and adroit commercially-oriented diplomacy, China has succeeded at India’s expense in procuring a supply network and business partners. Consequently, it is very likely that well-known international players who succeed in demonstrating a willingness to be reliable and politically low-key partners in commodity market development will be welcome in India.

(Prepared for Forrest Research, Oxford, UK)

Rio – BHP Tie Up: A Real Fear and Test for China

Thursday, January 24th, 2008

(From December 2007)

As French President Sarkozy leaves Beijing with his sale of 160 Airbus planes cleared for take off, we are once more reminded of how the Chinese state operates in international markets. Airbus- Boeing, Ariva-Westinghouse, GM-Volkswagen, BNP-Paribas—Morgan Stanley; wherever possible, Beijing’s leaders play country-company competitors off against one another in an effort to influence both the corporations and the national governments to which they are connected. BHP-Rio is a bit different, though. Given the close connections both firms have to a single national government: Australia. That government just took a step closer to Beijing, in any case, when Mandarin-speaking former China-based diplomat, Kevin Rudd became Australia’s Prime Minister-elect. This will be a nice test of how Chinese grand strategy, near-term foreign policy, and commodities acquisition policy intersect.

BHP/Rio Tinto: Chinese frustrated by inability to impact merger with US-EU style anti-trust legislation

Dec. 4, 2007

China could look to draw up new regulations to restrict BHP and Rio Tinto’s business in China if the two commodities giants merge, said a Chinese government advisor. But the adviser warned that it was not clear who would take the lead in proposing the idea to the central government decision maker or legislator.

According to the government advisor who is familiar with the metals sector and related legislation, China’s anti-trust law, which will take effect from 1 August 2008, does not include any clause which emphasizes its overseas effectiveness and therefore does not have any power to influence the proposed merger of BHP and Rio Tinto. However, the government advisor argued that some new regulations should be drawn up to restrict BHP and Rio Tinto from doing business in China and with Chinese companies. China should learn from the US and EU and try to protect domestic players that are affected by overseas mega mergers.

”However, I really doubt whether Chinese steelmakers can come together and propose this idea to the decision maker or legislator,” the advisor concluded.

A provincial Chinese steel sector regulator based in the north of the country agreed with the government advisor that China should do something via the legal system to block the merger between BHP and Rio Tinto. The regulator was also concerned that there was no obvious candidate who could act as a focal point for putting such a plan into action. Baosteel, the Chinese steel giant, and the Iron and Steel Association (ISA) are exactly the kind of entities that could propose such an idea, said the regulator. However, so far, neither party has made any clear comment on the BHP/Rio Tinto deal, the regulator observed.

A Chinese iron ore importer agreed that China could and should have some influence over the BHP/Rio Tinto deal. “The key thing is whether we can find any legal access to influence the deal,” said the iron ore trader. The trader also saw little possibility that the ISA would lead in proposing any legislation against the deal. ”Each steel maker has its own idea,” said the trader. “The ISA might not be able to speak with one voice.”

The above-mentioned regulator said that he had just come back from a conference held in Beijing which had focused on steel industry consolidation. He said that he learnt from the conference that China would encourage and speed up consolidation among domestic steel makers and try to develop some steel giants to counter the impact of the overseas merger of iron-ore suppliers.

Meanwhile, China has also enhanced investment in its iron ore resources, said the regulator, citing Hebei Province as an example. The regulator said Hebei had invested several billion Yuan in its own iron ore resources and had quickly seen an increase in domestic production by about 5m tons this year.

”China’s huge investment in iron ore resources will see a good yield in two or three years,” said the regulator. He further revealed that Anshan Iron and Steel Group (An Gang Ji Tuan) and Benxi Iron and Steel (Ben Gang Ji Tuan), a merged entity as big as Baosteel, could self supply 70% of its iron ore demands. Taiyuan Iron and Steel (Tai Yuan Gang Tie Ji Tuan) can self support 60% of its iron ore demands.

”Only Baosteel and steel makers in Shandong province are more reliant on importing Australian iron-ore resources,” said the regulator.

According to the regulator, the main dispute between Chinese buyers and Australian sellers of iron-ore price in 2008 was over the shipping costs. Both sides were focused on trying to control the shipping resources, said the regulator.

Fight for stake in China's larges investment bank and the soul of Chinese securities finance begins: Morgan Stanley 34% stake in CICC up for sale

Friday, January 18th, 2008

Lest anyone think that mergers and acquisitions in China’s securities industry is a one way trip to the market and less state power in Chinese securities finance this news should be a useful corrective. EvalueServe’s “Emerging Markets Now” reports that Jianyin Securities is considering buying out Morgan Stanley’s stake in China’s largest investment bank. Jianyin is owned by the Chinese-government-controlled Central Huijin Investment Co.

If reports from Bloomberg are to be believed, this would put put Jianyin in competition for the 34% stake in CICC with other big investors TPG, CV Starr, and J.C. Flowers.

China Jianyin Investment Likely to Buy Morgan Stanley’s 34.3%
Stake in CICC

17/01/2008
China Jianyin
Investment is considering buying a 34.3 percent stake in China International
Capital Corporation Limited (CICC) from Morgan Stanley. Following the stake
sale, Morgan Stanley plans to establish a securities firm with China Fortune
Securities. China Jianyin Investment, with a 43.35 percent stake in the company,
is CICC’s largest shareholder.

With a registered capital of about USD
2.7 billion, China Jianyin Investment is wholly owned by Central Huijin
Investment Co., Ltd.

Established in 1995 with a registered capital of
USD 125 million, CICC is the first joint venture investment bank in China.

http://www.bloomberg.com/apps/news?sid=aU1nvAhxSuLw&pid=20601103#

Morgan Stanley Gets Approaches for Stake in CICC, People Say

By Cathy Chan and Zhao Yidi

Jan. 11 (Bloomberg) — Morgan Stanley has been approached by
TPG Inc., CV Starr & Co. and J.C. Flowers & Co. about potential
bids for its 34.3 percent holding in China International Capital
Corp., two people familiar with the matter said.

The stake in the Beijing-based securities firm may be worth
about $1 billion, the people said, declining to be identified
because the discussions are private. New York-based Morgan Stanley
invested $35 million in CICC when it was set up in 1995 as the
first Sino-foreign investment bank.

Morgan Stanley ceded management control of CICC in 2000,
making it unable to participate directly in a market where stock
sales reached $65 billion in 2007, up from $5.9 billion seven years
earlier. The firm is seeking government approval to form a local
investment bank with China Fortune Securities Co., following a
strategy employed by Goldman and UBS.

“The Morgan Stanley-CICC venture hasn’t worked very well for
years,” said Donald Straszheim, vice chairman of Los Angeles-based
Roth Capital Partners LLC. When Morgan Stanley bought into CICC,
“great things should have followed. But they didn’t.”

Shan Weijian, a Hong Kong-based managing director at Fort
Worth, Texas-based TPG, didn’t respond to a call to his mobile
phone. A phone call and an e-mail to J.C. Flowers in London weren’t
immediately returned. A call to CV Starr’s New York office outside
of business hours wasn’t answered. Morgan Stanley spokeswoman
Cheung Poling declined to comment.

Morgan Stanley gained a nine-year head start in the country
through its CICC investment. It gave up control in 2000 amid
friction with local partners. CICC is now run by Levin Zhu, the son
of former Chinese premier Zhu Rongji, and Morgan Stanley has a seat
on its board.

Firms Line Up

Dow Jones earlier reported the talks, citing people it didn’t
identify. The Financial Times said CV Starr, headed by Maurice
“Hank” Greenberg, is interested in CICC, citing President Ed
Matthews.

In September 2006, China banned foreign firms from buying into
local securities companies and refused to take applications for new
licenses, saying the domestic industry needed more time to get
ready for overseas competition. Goldman, the world’s biggest
securities firm, and UBS set up local ventures before the
moratorium took effect.

Wall Street firms including Merrill Lynch & Co., Citigroup Inc.
and JPMorgan Chase & Co. are also seeking local partners in China
so they can profit from initial public offerings and a fivefold
increase in stock trading on the nation’s exchanges last year.

Disagreements

Credit Suisse Group, Switzerland’s second-largest bank after
UBS, on Jan. 10 said it plans to take a 33.3 percent stake in a
venture with Beijing-based Founder Group and apply for regulatory
approval to arrange yuan-denominated share sales.

China’s securities watchdog in December announced new rules,
effective this month, that allow investors from abroad to buy as
much as 25 percent of publicly traded brokerages. For investment
banking ventures, the ownership cap is 33 percent.

The government allowed Morgan Stanley to invest in CICC in
return for using its expertise to help build China’s first
investment bank. Elaine La Roche, the last Morgan Stanley-appointed
chief executive of CICC, stepped down in June 2000. There had been
disagreements between the two firms over management, she said in a
2005 interview.

Zhu, who was hired as a banker in 1998, became CEO of CICC in
October 2002. China Jianyin Investment Ltd., controlled by
government-owned Central Huijin Investment Co., is CICC’s biggest
owner with a 43.3 percent stake.

Morgan Stanley was the top arranger of overseas share sales by
Chinese companies last year, up from 10th in 2006, Bloomberg data
shows. That was the second time it surpassed CICC’s ranking in such
offerings since it invested in the Chinese firm.

To contact the reporters on this story:
Cathy Chan in Hong Kong at

kchan14@bloomberg.net
;

Last Updated: January 11, 2008 05:55 EST

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