From Sandton to Shanghai

(Photo: Julian Hewitt. Getting to Grips with China is not always this straight forward)

There is a popular quote doing its rounds in China at the moment that goes something like this: ‘Visit China for a week and you can write a book, stay for a month and you can put together a sizable article. If you are here for a year, you can probably write a short newspaper story. Live in China any longer and the experience is so overwhelming that you would be lucky to write more than a paragraph.’

As a friend told me the other day, live in China for any length of time and the old Chinese saying of ‘knowing what you do not know’ becomes a truism rather than ‘knowing what you know.’ However, there seems to be no end to people on week-long stints to China if the proliferation of Sino-centric titles at the local bookstore on offer is anything to go by!

On the other hand, there are some smart and super perceptive China old hands (中国通) whose commentary finds ways of slicing through all the noise and getting to the essence of it all. If you are interested in demisting some of the mystery that surrounds the Middle Kingdom, here are two great places to start:

Orville Schell is a long time Far Eastern expert who has written 9 books on China. The Long Now Foundation recently recently hosted a talk by Orville titled ‘China Thinks Long Term, but can it Relearn to act Long Term.’ Orville starts his conversation off with this powerful insight: ‘China is the most unresolved nation of consequence in the world.’ His talk is 1.5 hours in length, so the best option is to download it here or alternatively listen to it online here.

Peter Hessler wrote one of my favourite China books called ‘Rivertown.’ It is a fascinating insight to the life of a foreigner in a far flung Chinese town on the verge of huge change. His subsequent Mandarin skills, inquisitive mind and connection to everyday Chinese people pursuing personal goals in a rapidly transforming society has provided a unique and grounded perspective to Peter’s further writings. You can listen to a wide-ranging National Geographic interview with Peter here.

Rather strangely, China has made virtually no investments in major multinational miners. In 2006, Larry Yung made a small blimp on the radar screen by purchasing a 1.1% (USD800 mn) stake in Anglo through his company China Vision Resources.

Investing in a multinational mining company is a highly sensitive, politically challenging task for China. Any Chinese company that has the ability to do so also has strong government ownership and this turns an equity purchase into an issue of national interest rather than a pure business transaction.

At the same time, China is finding itself in a difficult position. It is still heavily reliant on companies such as Rio Tinto, BHP Billiton and Anglo American for its supply of key resources such as iron ore, high grade coal, copper and nickel. Rising commodity prices are placing pressure on manufacturing costs and resource sustainability – the backbone of China’s current economic rise to fame.

The ‘hot off the press’ news that the China Development Bank has bought a 1% stake in Rio Tinto. It comes at a very revealing time indeed. Rio is currently subject to a hostile take over by BHP Billiton. According to a Daily Telegraph article, if successful, this super-sized merger would give the company a 40% control of the iron ore market. As a crucial commodity to its manufacture-driven economy, China currently consumes half the world’s iron ore supply.

A merger of this magnitude would definitely be detrimental to China’s iron ore bargaining power. By purchasing a bigger stake in Rio, China Development Bank could thwart BHP’s acquisition plans. It would also as the perfect excuse for China to make its first big investment in a major mining stock. This would probably be one of the few times that a company like Rio would actually welcome China taking a significant stake in them.

There will be some hard bargaining and Mandarin translation going on in the Rio Tinto boardroom. And if that fails then attention will shift to the next most likely prospect…

Photo courtesy of China Daily

After ICBC opened Chinese and South African eyes to a new world of investment possibilities, there must to be a number of large Chinese companies taking a closer look at South African service sector companies with a large African footprint.

There is not a huge amount to choose from that satisfy these criteria while allowing for a significant level of investment , but here are two companies to keep eyes your on:

MTN

MTN’s name has already been bandied about by the South African press as a possible target for Chinese investment. It has the widest coverage of any cell phone company in Africa, its making a lot of money on the continent and has a strong presence in countries where China has already invested significantly. These countries include Nigeria, Zambia, South Africa, Angola and the DRC.

Sanlam

(Click here for the a report on Sanlam’s Developing Markets prospects)

Sanlam is another interesting prospect. It has a presence in Botswana, Kenya, Ghana, Tanzania, Zambia and is looking at expanding into Nigeria. While Sanlam’s Africa strategy is not yet properly developed, it does have the potential for African expansion to suit a Chinese emerging market focus. The Chinese insurance sector has also recently seen the IPO of two massive companies and this has given them capital to burn. Of course, the Chinese sector has much room for development, but China’s insurance heavy weights will already be contemplating international strategies.

(The world’s 3rd and 5th tallest buildings are etched in the background of Shanghai’s oldest tea house. Photo: Julian Hewitt)

China is a confident nation. You have to be to call your country the Middle Kingdom. One only needs to look at a Chinese map of the world to see that China and not Europe is placed in the centre. As a Eurocentric country, to South Africans it seems only natural that Europe should be in the middle of the globe. After all, the Greenwich Meridian runs through London and not Beijing.

However, Beijing has its own meridian and if you stand in Tiananmen Square, you stand in the very heart of the Chinese world. Look north and you see the Forbidden City – home to Ming and Qing dynasties and site of the Imperial City during the Mongol Yuan Dynasty. Rather significantly, the newest edition to Beijing’s sacred meridian is the Olympic Stadium.

It was in 1421 that China was last open to the rest of the world. After a fire ravaged the Forbidden City, it was taken as a sign that heaven’s mandate to the emperor was under threat. China, as is custom after long periods of history, closed ranks on the outside world. Foreign envoys were recalled, books burned and China’s advanced navigation programme stopped in its tracks.

It took another 400 years for Western colonial powers to pry an unwilling China from its reclusive shell. But China was not quite ready to face the world. The country was weak and divided. It took an extended struggle by the Communists to win the hearts and minds of the peasants in overcoming China’s Nationalist Party, who then fled to Taiwan. Under the ruthless leadership of helmsman Mao, a long divided China became reunited. As the Chinese say, if the old does not go out, the new cannot come in.

Subsequently, China was been reclaiming its global status. Hong Kong and Macao are back in the Mainland fold. Taiwan’s influence has been whittled down to diplomatic relations with just over 20 of some of the world’s most insignificant nations.

Meanwhile, the country’s economic machine has been powering full steam ahead - smoothing over the chasms of moving from a communist to a market economy with relative ease. China has been like a coiled spring waiting to be sprung. History will recall how Deng Xiaoping launched China’s Special Economic Zones in 1979 that would become the engine behind the south and east coast’s economic revival.

Towards the end of 2001, under the rule of the Central Communist Party, China took a real great leap forward in joining the ranks of the World Trade Organisation. Now the country awaits the Beijing Olympics with trepid anticipation. The world will be invited back to China on a scale not seen for over 500 years.

While the planet is becoming more China centric, in China’s mind the country is merely coming round the full circle. After all, the country was the most technologically advanced nation on earth in the Middle Ages and through its sheer size, China can also claim to have been the world’s largest economy for 1700 of the last 2000 years.

Australia’s opposition leader and head of the Labour Party, Kevin Rudd, made a lasting impression on the world’s second most powerful man. Much to Chinese President, Hu Jintao’s delight, at a recent APEC meeting, Kevin addressed President Hu in fluent Mandarin – the fruits of having served as a diplomat in Beijing for a number of years.

With this in mind, I am earnestly hoping that Comrade Zuma has also picked up some Chinese from his struggle days.

(Shanghai’s impressive skyline viewed from the lofty heights of the Jin Mao Building Photo:Laurette Moolman)

Time to Return the Compliment

For too long, South Africa has viewed China as a nation of cheap textiles and import quotas. There are much bigger opportunities and threats to grapple with on the very near horizon. China has a pragmatic view of its relationship with Africa and it is time we returned the compliment.

When Standard Bank issued a recent cautionary that a transaction of material nature was soon to be announced, it was clear that a big shake up was headed the way of the South African banking industry.

A big deal was afoot. For it to be material, the imminent investment had to be over 25% of Standard Bank’s R150 billion market capitalization. The money market soon provided further clues. Since the notice was publicized, the Rand had strengthened considerably. It was a sure sign that the market was already pricing a foreign purchase into Standard Bank.

Standard Bank and ABSA have the largest African footprint of South Africa’s Big 4 banks, but ABSA had already been snapped up by Barclays. Most American and European banks were still recovering from the sub prime mortgage debacle and were in no mood for international acquisitions. It looked like a Chinese bank was in the running.

Since ABSA was already under foreign ownership, the Competition Commission loomed as a large obstacle for any company braving a majority purchase in Standard Bank. Chinese suitors have access to money and not international management expertise, so a minority stakeholding was most likely.

Armed with these facts, 2 days before the official announcement, it would have been possible to make an informed prediction that a Chinese bank was buying a minority stake in Standard Bank.

A Lesson in Pragmaticism

In a similar lesson in pragmaticism, any rudimentary analysis of mining opportunities in the DRC would have pointed to the fact that it would have had to be high on China’s wish list. After all, the DRC has the largest untapped mineral resources in the world and had a complete lack of infrastructure to mine it.

This was the perfect situation for an increasingly risk averse China with regards to exploiting mining situations in Africa. Given that China already has significant oil and raw material investments from Sudan and Zimbabwe to the most unstable parts of Nigeria and Ethiopia, a sizable investment in the DRC was only a matter of time.

Again, when China announced a USD5 billion mining development and infrastructure package to the DRC, the world seemed to have been caught off guard.

Rather than be astonished by China’s foreign investment strategies, it is essential for South African decision makers to step back and look at the situation from a rational perspective.

China’s first wave of investment in Africa was state-driven around national interests and focused on developing sustainable supply lines for oil and energy extraction. South Africa was largely left out of this investment loop as Chinese money flowed into Nigeria, Angola, Sudan and Zambia. In many ways China was a direct competitor to South African mining and construction companies with an African agenda

China has a very comprehensive investment plan for Africa. It has already invested heavily in continent-wide mining, construction and infrastructural projects. China’s assumption is that this will also equate to a bottom line impact on the economic development of the countries being invested in.

As it is, Africa’s recently strong economic growth rate is riding the wave of a largely Chinese-fueled commodity boom. Higher growth rates are supporting increased household spending on goods and services. South African companies boast a significant African footprint and are in a prime position to benefit for this. From China’s viewpoint, they make for attract investment vehicles.

The Second Wave is just Beginning

The second wave is just beginning. Massive Chinese state owned enterprises are listing for the first time. In the space of 5 years, the global capital market has shifted from New York to Shanghai and Hong Kong, buoyed by a rampant Chinese stock market.

Make no mistake of the size of these Chinese companies. Their market capitalization might be propped up by over exuberant mainland investors, but Standard Bank’s new partner – ICBC – is 60% larger than its closest USA banking rival. Keep in mind that China has 1.3 billion consumers to tap into - 400 million of whom own cell phones and another 100 million who surf the internet.

These huge enterprises are cash flush from recent listings. They have capital to burn and global ambitions to pursue. While most companies still have significant government ownership, the second wave of Chinese investment is driven by business opportunities.

For shrewd local investors and local business leaders, it is crucial to weigh up two important facets. Firstly, keeping tabs on big Chinese IPOs is important as this will inform the source and sector of future global and South African investments.

Prophetic Insight

Secondly, an analysis of South African service sector companies with a large African presence is essential to predict future Chinese investment patterns. Linking these companies and their sectors to their respective listed Chinese counterparts will provide prophetic insight.

ICBC’s investment in Standard Bank was the biggest international investment China had ever made. If Sasol’s USD6 billion Coal to Liquids programme sees the light of day in China, it will be the single largest FDI into the country. As a relatively small economy, South Africa has the scope to play a surprisingly influential role attached to the coattails of an emerging economic giant.

We do however need to get closer to the action and be less surprised by the possibilities that are emerging from China. A rather large second wave is already hitting our shores.