No Let Up in China's Corporate Acquisitions, But Challenges Abound

On Wall Street, China's government owns nearly 10 percent in the U.S. investment bank Morgan Stanley. In Australia, it has stakes in the country's three biggest banks and the mining giant Rio Tinto.

In the past year, China has opened up its purse, spending billions of dollars of its surplus foreign exchange reserves overseas.

Earlier this month, a government investment agency bought a stake in British Petroleum. It also invested in BP's French competitor, Total.

Jesse Wang is executive vice president of the government fund manager China Investment Corporation. CIC owns stakes in Morgan Stanley and the U.S. private equity company Blackstone. He explains why China is shopping overseas.

"The appreciation of the renminbi, the decline of the U.S. dollar value [would] incur more losses if our money is kept in the foreign reserves which will basically invest in U.S," he said. "Treasuries [that] will not produce enough return to cover the appreciation of renminbi, inflation. So the central government decided to [have a] separate institution to manage some of foreign exchange to have more aggressive investment policy to gain higher return."

CIC, formed last year, is one such vehicle.

China has accumulated $1.6 trillion in foreign exchange reserves, largely from exports.

Most of the money is in American dollars, which means the value erodes as the dollar weakens. Earlier this month, the dollar fell to below seven to the renminbi, the lowest since 2005 when China ended its currency's peg to the greenback.

Overseas investments by Chinese companies rose six percent, to $18 billion, last year, from 2006, not including investments by financial institutions.

But these investments have caused unease in the West, primarily because many target companies involved in vital resources - oil and minerals.

China is hungry for energy and raw materials to fuel its fast growing economy.

Earlier this year, state-owned coal company, Chinalco, teamed up with the U.S. firm, Alcoa, to buy a 12 percent stake in mining company Rio Tinto.

The stake in Rio Tinto, which has been in merger talks with another mining behemoth, BHP Billiton, is widely considered a move to secure supply of crucial metals as commodity prices rise.

Overseas political concerns have tempered China's investment strategy. In 2005, opposition in Washington stopped an attempt by a Chinese company to buy the U.S. oil business Unocal.

These days, Chinese investors mostly buy small stakes, which involve less oversight and are less politically sensitive. But that leaves Chinese investors with little control over the assets.

Jean Francois Huchet is director of the French Center for Research on Contemporary China, in Hong Kong. He says Chinese investors are being careful for now.

"They do not want to attract too much attention," he said. "I suppose when they will have the possibility to act, they will act as active investors. If they reach 20-25 percent of a company, I suppose they will act and [that] could come sooner than we expect given the necessity of China to secure oil."

China's investments have not always been successful. CIC sits on millions of dollars in paper losses in its investments in the United States because of the current market downturn.

Wang acknowledges that there is much Chinese companies and funds have to learn.

"We lack experience. Without experience, but with a lot of money - that becomes trouble. We have to learn from our mistakes," he said.

CIC's investment in Blackstone's initial public offer (IPO) attracted criticism domestically because Blackstone shares now trade nearly 50 percent below their original price.

Other challenges come from culture and perceptions. Some critics say that China's overlooks poor human rights conditions in countries such as Sudan.

Huchet of the French Research Center also says Chinese business practices often do not work, overseas.

"There is this way to operate in China that obviously is a problem when they go abroad," he said. "They tend to reproduce what's going in China because there's no culture of collective bargaining, having free trade unions."

But he says Chinese companies do not necessarily behave worse than other companies overseas.

China's overseas investment push is young. Wang at CIC says these deals face plenty of scrutiny both at home and overseas, and that companies such as his need to act transparently. Both investment experts and China's critics say given time, these foreign investments will become more successful, and more accepted.