David Marsh: China Gobbles Up Companies Across the World to Stem Osses

2015-09-08 IMI

The Official Monetary and Financial Institutions Forum (OMFIF) is a global financial think tank headquartered in London. David Marsh: Managing Director, Official Monetary and Financial Institutions Forum (OMFIF) The record $94 billion decline in China’s foreign-exchange reserves in August, an amount larger than the official currency holdings of the U.K. or Canada, has commanded international headlines. However, amid signs that Beijing is accelerating its build-up of foreign “real assets” in quoted and non-quoted equities, infrastructure and real estate, the People’s Bank of China’s official reserves are becoming a less important guide to the overall value of China’s wealth held abroad. China sold some of its official dollar and euro holdings to support the renminbi during a volatile month for the China currency, marked by a loosening of its peg to the dollar, a long-foreseen move to make the renminbi more responsive to market developments. This took China’s official currency reserves to $3.6 trillion, down $400 billion from a peak in June 2014. Volatility on Chinese stock markets is one of a series of factors helping drive funds out of the country. Far from being alarming, this is part of a generally healthy rebalancing of China’s net foreign assets. Foreign equity holdings by private- and public-sector companies are progressively taking over a larger share of China’s overall net foreign asset position, estimated at $1.8 trillion at the end of last year, making it the world’s second-largest net foreign creditor (behind Japan and ahead of Germany). Significant signs of a portfolio shift are taking place in Europe, with Germany and the U.K. in the lead as most-coveted destinations for Chinese investments. The state-owned Beijing Automotive Group is in talks with Germany’s Daimler about taking a “significant” stake in the Stuttgart-based company by the end of the year, which will almost certainly involve a sizable degree of technology transfer from Germany to China. Fosun, the Shanghai-based investor group, is negotiating to take over the troubled Frankfurt BHF-Bank in a contested deal, shortly after it acquired the private bank Hauck, a competitor institution also based in Frankfurt. The U.K. has become an attractive home for Chinese asset managers building real estate and infrastructure holdings, with an estimated 11.7 billion pounds spent acquiring stakes in U.K. businesses over the past decade. According to industry figures, between 2000 and 2014 Chinese companies spent 46 billion euros on more than 1,000 direct investments across the European Union, with most deals struck since the 2009 financial crisis. The pickup in interest in “real assets” demonstrates how Beijing has reacted to a lamentable track record in making returns from its more conventional holdings. A research paper from the Basel-based central bankers’ bank, the Bank for International Settlements, in September 2013 underlined how China and Germany recorded entirely different performances in their overall foreign investments over the past 15 years. Although Germany’s net assets have been on average lower than China’s, it made consistent annual returns since 2005 of between 5% and 6% of its net international asset position, according to the BIS paper, while China turned in regular annual losses averaging around 3% to 4% of its asset position since 2008. The BIS experts ascribe this to two overriding reasons. First, the official sector — both government entities and the central bank — accounts for a much greater percentage of internationally held assets in China than in Germany. Second, and more importantly, China’s net investments have been substantially geared to other countries’ (mainly the U.S.’s) debt instruments, whereas Germany has been orientated far more toward portfolio investments in equities and in direct investments, often denominated in its own currency, the euro. There is strong evidence from many quarters that the Chinese authorities are taking steps to gear the country’s overall foreign portfolio into a greater proportion of equities and equity-like instruments, and that the trend may well be accelerating.

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David Marsh: China Gobbles Up Companies Across the World to Stem Osses

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