Chongqing shows its muscle

Chongqing (Getty Images)

Asia Times | 3 June 2009

By Olivia Chung

HONG KONG - In a gesture that could bring tears to the eyes of California governor Arnold Schwarzenegger and his budget-stricken counterparts around the United States, the Chinese municipality of Chongqing plans to go on an US$8 billion overseas spending spree, scouring the world for assets that may eventually strengthen the economy of the central mainland region.

Huang Qifan, executive vice mayor of Chongqing, said at a seminar last month that the city government wanted to spend money at a time when distressed assets were available at relatively cheap prices.

"Amid the global financial crisis, capital in land, mines, stocks, enterprises and high-tech equipment are shrinking," Huang said. "Assets valued at 10 yuan [US$1.50] previously are now worth two yuan. It would be foolish not to buy anything right now."

Chongqing's bulging coffers stand in stark contrast to those of California, America's most populous state and in 2007 the one with the largest gross domestic product. This month, it asked the US Treasury for help as it struggled to borrow as much as US$23 billion to pay its bills. Schwarzenegger, warning that the state's projected deficit would swell to $15 billion by next June, said he might have to release 40,000 prisoners or lay off 51,000 teachers if voters rejected three budget balancing measures - which they then did.

Across the country in New York, city mayor Michael Bloomberg intends to cut 13,500 jobs and increase sales tax in moves to reduce the city's budget deficit, according to a Bloomberg News report this month.

Burgeoning trade between China and the US has helped swell the treasuries of Chinese central and local authorities as the country's economy grew at a world-beating 10%-plus annual rate over two decades. Strong exports have helped to raise the mainland's foreign reserves to more than $2 trillion.

At the regional level, the granting of increased autonomy to Chongqing, until 1997 a part of Sichuan province, has helped it to prosper amid a property boom, increased industrial production and improved tax-gathering.

Even so, the decision by a local authority such as Chongqing to invest overseas is unusual. More common have been purchases by Chinese companies, such as computer-maker Lenovo buying IBM's laptop business in 2005, while aluminum company Chinalco is waiting to hear whether it will get the Australian government's permission to double its interest in Australian miner Rio Tinto to 18%.

Such deals are being encouraged by the central government. Li Rongrong, minister in charge of the State-owned Assets Supervision and Administration Commission (SASAC), told visitors to the Boao Forum for Asia annual conference in Hainan province in April that money was not a problem for Chinese enterprises planning to shop overseas. That is apparent from recent tours to the West by Chinese delegations.

Commerce Minister Chen Deming in February led a purchasing tour of business leaders to Europe, when deals worth more than $13.6 billion were signed in Germany, Switzerland, Spain and Britain.

Among the deals, British-based engine maker Rolls-Royce will sell $1.2 billion worth of airline engines to Hainan Airlines' parent company, the HNA Group. Switzerland's ABB, a global leader in power and automation technologies, signed a letter of intent to supply generator circuit-breakers to China Nuclear Power Engineering Company.

Switzerland's Glencore, one of the world's largest suppliers of a wide range of commodities and raw materials to industrial consumers, also signed a deal with Chinalco, the world's second-largest alumina producer. Holcim, one of the world's leading suppliers of cement and aggregates, agreed to supply technology and equipment to China's Huaxin Cement Co.

This spring, a similar group toured the United States, including visits to San Francisco, in Schwarzenegger's California, Washington and Chicago, signing trade and investment contracts worth $10.6 billion, according to Xinhua News Agency.

In Chicago, Mayor Antonio Villaraigosa no doubt noted among the Chinese delegation executives from Beijing Capital International Airport Co, operator of China's busiest airport. Villaraigosa was attempting to close a $530 million budget gap after the city failed to secure $2.5 billion by privatizing one of its airports.

She may also have looked enviously at the surge in value since March of the Beijing airport company's shares tradable in the US. They have nearly tripled in worth to 32 US cents, shortly before the delegation's American tour, to 81 US cents on Tuesday.

Among other companies looking to secure agreements in the US were China's largest refiner, Sinopec; its leading search engine Baidu.com; and the private Beijing Huaqi Information Digital Technology Co Ltd.

While the Chinese government is happy to support corporate purchases overseas, less clear is the degree of support being given to local authorities for such purchases. Chongqing is the first municipality to follow the state's "go abroad" policy.

The city (as it is referred to in China, though including extensive rural and mountainous areas), it operates directly below the level of central government, rather than through province-level authorities. That puts it on the level of Beijing, Shanghai and Tianjin, which it lags on must economic indicators although geographically more extensive, covering a land area of 82,400 square kilometers, roughly the size of Wales.

It has a population of more than 30 million, yet forests cover about 35% of the municipality, with its mountainous terrain cut through by the Yangtze and Jialing rivers.

High on Chongqing's shopping list is more than 333,000 hectares of farmland, which Huang said would reduce the city's dependence, for example, on imported edible oil.

"China needs to import tens of millions of tonnes of vegetable and edible oil a year. Meanwhile, Chongqing, which needs 400,000 tonnes a year, produced only tens of thousands of tonnes of rapeseed oil," he said.

An iron-ore mine is also being sought to supply Chongqing Steel, one of the mainland's leading steelmakers, which has an annual demand for 10 million tonnes of ore and is seeking ways to minimize the rising price of the raw material.

The heavily industrialized area also sees the present global downturn as an opportunity to pick up bargains in machinery and equipment.

"Three years ago, machinery equipment might have been valued at $1 billion. But now they are valued at $100 million or $200 million ... Therefore, if we pay $2 billion for assets, we are in fact buying something worth $10 billion," he said.

Figures from Ernst & Young go some way to supporting Huang's arithmetic. The market value of the world's mining and metal companies has dropped about 40% to 60% due to the world economic downturn, the global consultancy firm says, offering a chance for cash-rich Chinese mining and metals firms to pursue overseas acquisitions.

But Huang's business philosophy was criticized in the mainland as too simple. Fu Chengyu, president of the China National Offshore Oil Corp, the nation's dominant offshore oil and gas producer, said it was naive to believe overseas mergers and acquisitions should be made purely because assets abroad became cheaper.

"If an asset's value has fallen to $1 from $100, there must be a reason of it," Fu said on the sidelines of at the Boao Forum for Asia annual conference in April. "If the asset value cannot be improved after the deal is done, then such a deal should not be done."

Academics also argued that buying overseas assets was best left to private enterprises, while even then differences in culture could undermine the value of acquisitions.

Shi Jinchuan, vice dean of the School of Economics at Zhejiang University, said acquisitions were the quickest way to boost core competitiveness, but many Chinese companies found the shock of culture differences and problems of integrating staff more troubling than financial and technical integration.

SASAC minister Li Rongrong and the Ministry of Agriculture have also recently rejected speculation that the mainland was contemplating amassing agricultural land overseas to ensure security of food supply. Li further warned that acquisitions should be done within the capital, management and technology capabilities of the purchasing company, otherwise the results would be catastrophic.

Some Chinese citizens have spoken out against Chongqing's spending plans, seeing them as a gamble with cash that would be better spent at home.

"The agriculture industry faces grave challenges with unstable weather and there are extremely poor farmers and herdsmen. Why can't we spend money on ourselves to improve scientific know-how for poverty alleviation and sustainable development in rural areas instead of others," said one in an Internet posting.

Darker official motives were also suggested.

"Would the plan be another chance for the city government to have a luxury trip? I really wonder how much money they can bring back home after pouring the $8 billion overseas," said another Internet posting.

Chongqing is certainly growing without overseas expansion. Its gross domestic product surged 9% to 103.22 billion yuan in the first quarter this year from 12 months earlier, compared with the country's average growth of 6.1%, which even then is the slowest pace in a decade.

The city government plans to spend 20 billion yuan over the next 11 years to add three runways at its international airport, the South China Morning Post reported in March, citing Huang.

But spending overseas will not directly ease one of Chongqing's greatest challenges, alleviating the frequent power shortages during peak summer and winter seasons. No amount of cheaply bought machinery will boost growth if there is no power to run it.

Olivia Chung is a senior Asia Times Online reporter.
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