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Thursday, 14 December 2017

China's outbound frenzy is real - and it's scary

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  • Jonathan Rogers
Jonathan Rogers experiences Beijing’s appetite for western brands first-hand

I’m in Beijing as I write this, enjoying my first trip to a city which I had somehow managed to avoid for professional reasons - my full-time gig didn’t warrant a visit - until a freelance opportunity presented itself.

The city is an agoraphobic’s nightmare. Distances between the buildings on the endless boulevards are vast, as if the town planners were on some powerful and sustained hallucinogens when they put the place together.

Tiananmen Square, in particular, looks as though it could accommodate the entire central business district of Singapore - my home - with ample space to spare.

An optical illusion, of course, and there are those who suggest that something similar applies to the entire edifice of China’s economy. For all the glitz and the shiny newness of everything, there is an attendant shadow of debt that must be repaid and cannot be. It’s all hubris for now.

Well, as illusions go, it’s pretty damn impressive, I have to say – notwithstanding the panicked and visibly paranoid desire to control that emanates from the agents of the state. Entering Tiananmen involves queueing in line, having your ID card scanned and getting patted down by shouting, uniformed flunkies.

Mind you, I suppose something similar has happened at British airports, and I wonder if it will soon be happening at our national monuments. I somehow doubt a Chinese tourist will have the pages of his or her passport flicked through in order to enter Westminster Abbey, as I experienced in order to get a ticket to enter the Forbidden City. Thankfully, my papers were indeed in order, and my entrance to that particular attraction wasn’t forbidden.

TALKING OF SCALE, and dare I say hubris, I will share a meeting I had with some senior Chinese loan bankers - for their sake I will not say for whom they worked. They were utterly gung-ho in terms of a few variables: size and the financing of Chinese mergers and acquisitions abroad.

There was talk of a mega acquisition loan running into the tens of billions of dollars that immediately made me think of the Kohlberg Kravis Roberts leveraged buyout of RJR Nabisco, which epitomised the cavalier capitalism of 1980s America.

And in that thinking I invite a comparison between the state of play in 1980s capitalist America and modern-day China. Surely such braggadocio exercises in financial leverage signal a system which is sick on something - let’s say hubris - and ripe for a takedown.

Well, of course, the element that is entirely different in China’s case is that the biggest players in this game are state-owned banks. KKR didn’t have that backing. And they are huge in terms of balance sheet and have endless government support to carry them through a bad call on funding an overseas takeover from the inside.

There were moves last year by the Chinese financial authorities to rein in what appeared to be a growing overseas M&A feeding frenzy; perhaps it was too soon to call an end to that frenzy. If talk of this mega loan bears fruit, then it certainly was.

Walking down the pristine shopping streets of Beijing last week, I realised first-hand the Chinese obsession with all that is Western. I passed yet another Apple store, with its hordes of customers (and they appear to be buying), passed huge photographs of David Beckham, so inflated in scale they rival the image of Mao Tse Tung hanging outside his mausoleum in Tiananmen Square - except he’s advertising a watch on his over-tattooed wrist rather than political revolution.

ALL THIS SUGGESTS the outbound M&A revolution from China to the West has only just begun. We’ve seen it already with ChemChina’s Syngenta purchase, the purchase of the AMC cinema chain by Dalian Wanda five years ago, and I’m sure we will see a lot more. It’s based on a phenomenon one can only fully appreciate from a visit to China.

But from the point of Western investors, be they in American equity markets or buying offshore dollar bonds, this “go out” policy can only be welcome. For now, they must ride the wave that Chinese capital has set in motion.

Anyone who has ever profited from an investment boom wants to say “it’s different this time.” For the moment, I suspect it might be, although the law of gravity will inevitably apply at some point.

This trip to Beijing has opened my eyes to the peculiar nature of the newly brewed Chinese capitalism. It’s hubristic, obsessional and, possibly, very scary.

But if a wall of Chinese money is responsible for frothy US equity prices - rather than the deregulation and low taxation of the Trump presidency - as well as for the ultra-low pricing of offshore bond spreads, then so be it. Better to ride the wave than crash out of it too early.

 

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