Author: CHUNG Yoon Ngan
Date: 08-13-12 20:25
Shopping for power
By Maricris Carlos
August 10, 2012 - 8:58am http://www.chinadailyapac.com
Buoyed by billions of dollars in foreign exchange reserves, China is on an unprecedented buying spree for global energy assets.
After staking their claim in Central Asia, Chinese investors are now bent on sealing more energy deals in Southeast and South Asia. “Many Chinese companies now see themselves as global actors, and are investing overseas as a diversification strategy,” says Michel Wormser, vice-president and chief operating officer at Multilateral Investment Guarantee Agency (MIGA), the political risk insurance agency of the World Bank Group.
“The concentration in Asia is a factor of the region’s proximity, investors’ greater familiarity with the neighboring countries, and good bilateral trade and commercial relationships.”
The forays come as the Chinese government encourages enterprises to continue their overseas push. Last year, Premier Wen Jiabao, in his annual Government Work Report, said the government would prioritize boosting outbound direct investment over absorbing foreign direct investment.
And in his 2012 report, he emphasized the point anew. “We will guide Chinese enterprises under various forms of ownership in making overseas investments, mergers and acquisitions in energy, raw materials, agriculture, manufacturing, service industries, and infrastructure in an orderly manner,” he said.
Chinese energy companies seem to have taken the encouragement to heart with deals reported in Pakistan, India, Nepal, Singapore, Cambodia and Myanmar. In Nepal, the government has cleared China’s Three Gorges Corporation’s $1.8 billion hydropower project in the northwest and invited Chinese hydropower firms to invest in projects worth $400 billion. China’s State-owned power firm China Datang Corporation is also said to show interest in Nepal’s hydropower sector.
In Singapore, China Guangdong Nuclear Power plans to put up an integrated biomass solar power plant, seen to play a significant role in the city state’s move to become a greener and cleaner city. In 2008, another Chinese firm, the Huaneng Group, agreed to pay Singapore’s Temasek Holdings $3 billion for Tuas Power.
In Cambodia, China has stakes in four hydropower projects with a total capacity of 722 megawatts. These are expected to be completed by 2015.
President Hu Jintao has encouraged Chinese enterprises to participate in energy projects in Pakistan, which is grappling with a power crisis. The Three Gorges Corp was reported last year to be ready to invest $15 billion in the South Asian country. Pakistan is reported to have sought China’s help to implement 19 energy projects.
And in Myanmar, media reports say China’s Guangdong Zhenrong Energy, which is partly owned by State-run Zhuhai Zhen Rong Corporation, is looking for a site for a 100,000 barrels-per-day refinery estimated to cost $2.5 billion. State-backed China National Petroleum Corporation is laying oil and natural gas pipelines that connect Myanmar with China’s southwestern province of Yunnan.
A number of Chinese renewable energy firms have also expressed interest in green projects in the Philippines, Indonesia, Thailand, Vietnam and Brunei.
Bill Dodson, principal at Shanghai-based consultancy TrendsAsia, says China sees Asia as an important source of energy.
“China’s first forays into the development of international oil deposits occurred in Central Asia just after the dissolution of the Soviet Union in the 1990s,” Dodson tells China Daily Asia Weekly.
“Since then, the playing field for energy resources in Central Asia has become crowded, with other countries vying for oil contracts and offering very attractive bids and perquisites.”
Also, geopolitical instability in Central Asia and changes in regimes and political structures add unwanted risk to China’s energy portfolio, he says. Southeast Asia, on the other hand, has greater affinities with China than Central Asia, both politically and culturally.
Besides, the Chinese diaspora’s network runs far and deep throughout Southeast Asia in a way it doesn’t in Central Asia, adds Dodson, who is also the author of China Inside Out: 10 Irreversible Trends Reshaping China and its Relationship with the World.
The interdependence of China’s economy and its Asian neighbors’ is an additional reason for its interest in the region. Dodson says since the turn of the century, the Chinese domestic economy has floated most of the Asian economies as they supply the dragon’s demand for natural resources.
“The growing interdependencies between China and the rest of Asia give China great leverage in negotiating deals with Asian counterparties. The Asian countries want to see their economies grow, and China is a very important key in that.” Besides, due to strategic interests Southeast Asian governments are less inclined to veto Chinese energy investments than Western countries, he says.
According to data provider Dealogic, China’s merger and acquisition (M&A) deals in the oil and gas sector so far this year amount to $1.14 billion in Australasia and $33 million in Southeast Asia.
Last year, Dealogic valued the deals in Australasia at $1.76 billion and $1 million in Southeast Asia. North Asia deals stood at $73 million last year.
Dealogic says that globally China’s M&A deals so far this year stand at $24.5 billion from $16.96 billion last year. Fernando Roxas, professor at the Manila-based Asian Institute of Management, sees China’s “trillions of dollars in trading surpluses” as a factor in its global acquisitions.
“They may already be the biggest bilateral lender in the world, like the Japanese decades before them,” Roxas says. “They have to reinvest the money in profitable ventures. Few are more profitable than power because Chinese companies also supply a lot of the machines and equipment for power generation.”
Wormser says China’s investment patterns reflect the increasing demand for energy and other natural resources needed to sustain the nation’s fast economic growth and significant urbanization.
Dodson agrees. He says infrastructure modernization and urbanization pressures in China will continue for at least the next 10 years, driving the country’s overseas energy foray.
“Urbanites use nearly four times more energy than their counterparts in the countryside, so the drive to acquire new energy resources will be unrelenting far into the next decade, at least,” he remarks.
Although China’s economy cooled in the first half with gross domestic product slowing to 7.6 percent for the sixth consecutive quarter, analysts say it is stabilizing and will recover in the second half.
“China’s acquisition of energy assets is of strategic importance to the nation’s well being, continued growth and social stability,” Dodson says. “Investment in resource deposits and refineries in Asia is not dependent on transitory cyclical trends in the economy. China’s efforts are meant to have a decades-long effect on the development of the economy and sustainability of a modern China.”
Wormser too expects China’s global energy acquisitions to continue. Though M&As fell for all sectors in 2011 due to the global financial crisis, he says energy and resources industries made up the largest proportion of the total value of the deals.
“M&As in energy and resources are expected to continue to make up the largest percentage of Chinese investments across borders in the future,” he says. “China’s economic growth and demands for energy and natural resources should sustain this trend.”
According to the Ministry of Commerce, non-financial overseas investments surged 94.5 percent to $16.55 billion in the first quarter. M&As accounted for $6 billion. The ministry says overseas investments will grow at an annual rate of 17 percent from 2011 to 2015, reaching $150 billion.
But the energy assets come with challenges.
Dodson says the greatest challenge concerns whether the investments truly benefit communities.
“Like New Zealand and Australia already have, other countries may begin to tally how much Chinese energy resource deals truly contribute to their societies and their environments. The countries of target acquisitions may consider the investments give too little back to the communities that the investments target.”
Wormser says Chinese firms are relatively inexperienced in these kinds of deals and may lack in-depth knowledge of local legal and regulatory frameworks.
However, they are now increasingly realizing the importance of adopting environmental and social standards that maximize the sustainability of their investments in host countries.
“After witnessing the recent events in the Middle East and recalling their own early experiences, Chinese enterprises going global are now much more aware of political risks and are considering risk mitigation strategies in their international ventures,” he says.
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