Issue: 181
Sent: 06-10-2009 12:16:01
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The Chinese are Coming or Maybe Not!Email Marketing Business Opportunity - Helen BairstowWe need more power cuts - Baby Boomers and the Ageing Population!The Easiest way to do a Client NewsletterWhy Warren Buffett won't buy a NewspaperAnti-detriment Augmentations and the Contributions Cap
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The Chinese are Coming or Maybe Not!

Click here to buy - A How To Book of SMSF's by Tony Negline
John Robertson

Chinese investors are proving less reliable than we had anticipated.

The presence of Chinese investors has breathed life into the Australian stock market during 2009, raised resource sector stock prices and maintained the flow of wealth which has kept the Australian economy aloft while other countries lurched into recession. In short, Chinese interests have played an important role in sustaining Australia's economic well being.

Their activity in the past year has been the culmination of their experiences in the prior eight or ten years. Chinese state owned enterprises had been prowling the world to access industrial raw materials for their factories and public infrastructure. Iron ore, copper and other base metals have been high on the list of targeted purchases.

As their industrial needs continued to grow and new supplies were less readily available, Chinese buyers reassessed their strategies. They began to invest directly to secure the supplies that they would need.

In a February 2009 ATC e-mail, I commented on this strategy against the background of the proposal by Chinalco to take a large stake in global miner Rio Tinto.

I observed that the Chinese approach was not historically unusual. In earlier years, companies from the United Kingdom, the USA, Japan and Korea had, in turn, embarked on much the same strategy when they were also seeking resources to feed their fast developing economies.

I opined that the Chinese are likely to become just as disillusioned over their decisions to invest directly in mining assets and that "we should let the Chinese pump as much into the Australian industry as we can get our hands on, committing them to large scale infrastructure spending wherever possible, before they get a chance to realize the mistake they are making".

In recent months, it seemed that any Australian mining group worthy of its place in the industry was lining up a Chinese partner. At a time when capital markets had lost all enthusiasm for risk, the Chinese were an (albeit atheistic) godsend. They had capital, the lifeblood of the resources industry, and the encouragement of an autocratic government.

From global giant Rio Tinto to up and comer Fortescue and mining minnow Terramin the Chinese were there setting the price and making the difference between commercial success and failure.

In the past few days, however, the ardour has seemed to dim. Fortescue announced that it could not finalize terms with its Chinese associate within the previously set deadline. Platinum Australia gave up and raised the capital it had been promised from local institutions rather than its reluctant Chinese partner. Lynas Corporation had to tap traditional investors in a deeply discounted $450 million raising after its Chinese benefactor backed out of their deal rather than limit its stake to 50% rather than 51%.

It is possible to read too much into these events. There are more deals going ahead than being cancelled. Nonetheless, to understand the risks attaching to this important source of national funding, we should ask some questions about what is happening behind the scenes.

Even with these few examples of deals falling over on which to draw, Australian companies should already be more circumspect about their interactions with Chinese interests.

Until now, many Australian companies have had a choice between a Chinese strategic investor focused on accessing long-term output and less concerned about share prices than others, on the one hand, and a broker pushing for a 15-20% discount to make a share placement, on the other. The choice had once seemed clear-cut but is now more ambiguous.

Until the Chinese money is in a bank and counted, companies will need to be more prepared to go with the broker to reduce the risk of ending up with nothing despite the potentially dilutive impact on existing shareholders. This could create additional equity supply for local institutions and individuals but, in doing so, place some downward pressure on equity prices.

A few examples of the Chinese themselves being rebuffed may emphasize to them that they need to become more circumspect in using their own economic clout. Alternatively, they might simply go somewhere else.

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