Prediction 2: Spot On! (China buys into Rio Tinto)
March 8th, 2008 . by Julian Hewitt
I am happy to say that my first big prediction in this blog has come to fruition. On 12th November 2007, I wrote that:
Almost 2 months later this is exactly what happened. On 31st January, according The Wall Street Journal: “Chinalco and Alcoa managed to snap up 9% of Rio by purchasing London-listed shares overnight Thursday, while avoiding leaks that might have alerted the market to their plans and given BHP time to respond.”
The deal was valued at massive USD14.1 and surpassed China’s previous international investment deals by a huge margin. While there is still the possibility of BHP upping the ante, China has a strong hand with its 9% stake in Rio Tinto. This makes future BHP efforts more financially risky and complex and significantly narrows their window of acquisition opportunity. Even if this happens, China will be happy in the knowledge that they have their first ‘super-stake’ in a global mining company.
Living in China is a fascinating experience and gives me an ear closer to the ground. Far from being a mysterious and opaque country that making foreigners perceive, many things are quite straight forward on a macro level in China. It is the micro level that defies comprehension.
On many accounts, China’s interests in thwarting a BHP - Rio takeover are very straight forward. If you understand the dynamics that drive China’s growth and the direct threat that a mining mega merger poses, then the outcome (but definitely not how the outcome is achieved) is more certain. Add to this China’s centralized decision making ability (which means that if something is of national importance it will be dealt with as a key prerogative) and China’s burgeoning foreign reserves mean that all but the biggest deals are out of their reach.
(China has gone from zero to significant international investor in 3 years. Source: Wall Street Journal)
This is a bad deal from a financial perspective. That foreign fund just keeps on losing money. They changed like 200 billion into American dollars and the Yuan keeps appreciating at a few percents a year. They lost a third of their investment in Blackstone and lost close to a billion in the Morgan Stanley. The Commodities industry is on top of a bull market and the prices are super high. With the economy now cooling down, prices should go down bringing down stock prices, thats my take on it. It’s a good political investment… China should just invest that money in education and get done with it!