Monday, January 9, 2017

China Deal Watch


China Deal Watch

Chinese companies are buying up overseas assets at the fastest pace on record. This graphic, updated weekly, takes a close look at what China is acquiring, and where. The numbers reveal a lot about the country’s growing global ambitions.

On Dec. 30China’s Nanjing Yingpeng Huikang Medical Industry Investment Partnership LPagreed to buy China Cord Blood Corp for $5.8 billion. Here’s how this deal compares to China’s other overseas acquisitions:
Rank8thlargest foreign acquisition by a Chinese company this year
2016 Total$247.2Bin foreign mergers and acquisitions
Growth142%increase from the same period in 2015

China’s overseas dealmaking started as a hunt for the raw materials needed to feed steel mills, support industrial production and keep the nation’s factories humming—the so-called old economy.
As China grew, so did its appetite for foreign acquisitions. They’ve shifted focus to acquiring the brands and technology China needs to transition to an economy driven by domestic consumption more than exports, labeled here as the new economy.

Total volume of China’s overseas deals

20062007200820092010201120122013201420152016New economyOld economy$0B125B$247.2 billion

As China’s dealmaking exploded, the types of companies it’s buying have changed. That change is easy to spot when you look at the industries of the target companies.

Deal volume by industry

20062007200820092010201120122013201420152016
Before 2013, China’s overseas dealmaking was dominated by state-owned companies acquiring iron ore deposits in Australia, energy producers from Canada and copper mines in Africa. More than half of the purchases were of energy and commodities companies. Now private entrepreneurs are snapping up marquee assets like Italian football teams, American film studios and French fashion houses while government-backed buyers purchase chipmakers and crop technology. For a better sense of how China’s targets have changed, let’s look at annual deal volumes by industry.  

Total deal values 2006 to 2016

Traditional Energy
Total: $148.4B
Finance
$90.5B
Mining
$73.6B
Property
$57.2B
Chemicals
$56.7B
Internet/Software
$43.5B
Utilities
$43.1B
Logistics
$30.2B
Environment/New Energy
$24.1B
Retail/Wholesale
$19.1B
Automotive
$18.9B
Health
$17.3B
Entertainment
$16.2B
Home/Office Products
$13.8B
Manufacturing
$13.3B
Construction
$13.1B
Semiconductors
$12.9B
Food/Beverage
$12.2B
Commercial Services
$11.3B
Telecom
$10.4B
Agriculture
$8.1B
Media/Ads
$7.5B
Aviation
$5.9B
Electronics
$5.7B

Favorite destinations

The charts below show China’s favorite destinations have shifted over time. Every deal of at least $100 million since 2006 is displayed.
China has made energy acquisitions across the world, with the biggest being Cnooc Ltd.’s 2012 agreement to buy Canada’s Nexen Inc. for $14.3 billion following smaller deals in Central Asia, Europe and South America. In recent years, it has started buying more consumer companies, with a $4.7 billion deal for U.S. pork producer Smithfield Foods Inc. in 2013 and this year’s $821 million purchase of Italian soccer team AC Milan. China has also made bolstering its technology prowess a national priority, leading to purchases like an IBM server business and chip designer Spreadtrum Communications Inc. See all
SwitzerlandChemicals
China National Chemical Corp
Agreed to acquireSyngenta AG
For$43.2B
North America
$1M$10M$100M$1B$10B$100B'06'08'10'12'14'16
Western Europe
$1M$10M$100M$1B$10B$100B'06'08'10'12'14'16
Asia Pacific
$1M$10M$100M$1B$10B$100B'06'08'10'12'14'16
Latin America/Caribbean
$1M$10M$100M$1B$10B$100B'06'08'10'12'14'16
Eastern Europe
$1M$10M$100M$1B$10B$100B'06'08'10'12'14'16
Middle East/Africa
$1M$10M$100M$1B$10B$100B'06'08'10'12'14'16

Can China keep buying at this speed?

The short answer: yes—unless something gets in the way. The growing number of deals is attracting close government scrutiny within China and around the world. Here are several potential roadblocks that could slow the pace of acquisitions:

Western governments step in to block purchases
The Committee on Foreign Investment in the U.S. has rejected some transactions in the technology industry and is wary of any potential acquisition that could affect national security. In Europe, German politicians expressed opposition to a Chinese takeover of robot maker Kuka AG, and the new U.K. government plans to create its own process for reviewing large investments in sensitive industries.

China’s own government cracks down on some types of deals
The Chinese securities regulator has sought to block pricey backdoor listings on domestic exchanges. Since many Chinese acquirers wanted to make money by relisting their purchases on a domestic bourse at a higher valuation, the additional scrutiny could upset their plans.

China puts limits on overseas fund flows
China’s currency supervisor has started to hold up overseas money transfers as it seeks to manage yuan outflows. Once a rubber stamp, the decision to approve cross-border fund transfers can now take weeks and delay M&A deal closures. The purchase of Qihoo 360 Technology Co., the largest privatization of a Chinese company listed in the U.S., missed its initial deadline after getting caught up in the process.

Banks curb their easy lending policies
Chinese banks have shown no lack of willingness to provide funding for acquisitions from both state-owned companies and private enterprises, with some forms of lending more than doubling this year. Any move to reign in credit to such buyers would hurt their ability to make splashy purchases.

China’s currency declines in value
Chinese companies expect the yuan to depreciate more, which would make overseas dealmaking more expensive. That’s encouraged them to make acquisitions now while their greater purchasing power lasts. If the Chinese currency has a serious decline, it could make domestic purchases more attractive again.

The pound is at a 3-month low against the dollar after Theresa May's 'Hard Brexit rhetoric'

The pound is at a 3-month low against the dollar after Theresa May's 'Hard Brexit rhetoric'

LONDON — The pound is falling against most major currencies on Monday morning after Theresa May signalled in an interview that the UK is likely to quit the Single Market when Brexit occurs.
Sterling is down 1.20% against the dollar to $1.2136 at close to 1.30 p.m. GMT (8.30 a.m. ET) and down 1.05% against the euro at the same time. The pound is now at its lowest point against the dollar since early October.ggbpInvesting.com
The slide has been sparked by an interview Theresa May gave on Sky News on Sunday. The Prime Minister signalled yet again during the interview that she is aiming for a "Hard Brexit" — Britain leaving the European Single Market in order to regain immigration and boarder control.
Deutsche Bank's Jim Reid says in his daily morning email on Monday: "Sterling has weakened following a Sky News interview yesterday with UK PM Theresa May in which she said the eventual exit of the UK from the EU will be about 'getting the right relationship' and 'not about keeping bits of membership.'"
Michael van Dulken, head of research at Accendo Markets, says in an email on Monday morning that the dollar's strength is partly to blame for the fall in the pound but adds: "UK PM May’s Hard Brexit rhetoric (ditch single market) in a Sky interview also gave Sterling a kick."
Traders see a "hard Brexit" as bad for UK PLC as it would likely mean higher trade tariffs and would prevent service industries such as finance from selling to the European market unless a transition deal is arranged while a trade agreement is put in place. Even if tariffs do not rise and a transition deal is reached, many fear that the lingering uncertainty around Brexit will reduce trade until a final deal is worked out, which could take years.

McDonald's unloads its business in China

McDonald's unloads its business in China

McDonald's Hong Kong ChinaA McDonald's outlet in Hong Kong seen in 2014. REUTERS/Tyrone Siu
HONG KONG — McDonald's Corp. has agreed to sell the bulk of its China and Hong Kong business to the state-backed conglomerate Citic Ltd and Carlyle Group LP for up to $2.1 billion, seeking to expand rapidly without using much of its own capital.
The 20-year deal caps months of negotiations between the fast-food chain, private-equity firms including Carlyle and TPG Capital Management LP, as well as several Chinese suitors.
The US fast-food chain said local partners would help speed up growth in the world's No. 2 economy through new restaurant openings, particularly in smaller cities that are expected to benefit from increased urbanization and income growth.
"McDonald's globally overall is struggling and didn't have the money or intellectual resources to focus on China," said Shaun Rein, a managing director at China Market Research Group.
The company has more than 2,400 restaurants in mainland China and roughly 240 in Hong Kong. The new partnership plans to add 1,500 in the two areas over the next five years.
Under the deal, Hong Kong-listed Citic Ltd will own about 32% of the business, with Citic Capital, an affiliate company that manages private-equity funds and other alternative assets, holding another 20%.
Carlyle will control 28% of the business, while McDonald's will retain a 20% stake, the companies said in a statement. The deal will be settled in cash and in shares in the new company that will act as the master franchisee for the 20-year period.
McDonald's originally wanted to raise up to $3 billion from the sale of the business but later decided to keep a minority stake to benefit from exposure to future growth in China, a person with direct knowledge of the plans previously told Reuters.
The partnership will also aim to boost sales at existing restaurants, with menu innovation a key focus. Fast-food firms including McDonald's and Yum Brands Inc. are recovering from a series of food-supply scandals in China that have undermined their performance.
"I'm not sure how much more you can do with McDonald's in China," Rein said. "They're a well-run company, so I'm not sure that Citic and Carlyle are able to add that much more aside from capital."
McDonald's said in March it was reorganizing operations in the region, looking for strategic partners in China, Hong Kong, and South Korea. The company later decided to keep its South Korea business.
Other companies that had bid for the China and Hong Kong assets included TPG, which teamed up with the mini-market operator Wumart Stores Inc., and the real-estate firm Sanpower Group Co. Ltd, which owns British department store House of Fraser Ltd, sources have said.
JPMorgan Securities is advising the buyer group, while Citic Ltd also said it hired Citic CLSA Capital Markets as its financial adviser and Citic Securities as financial adviser in China. McDonald's hired Morgan Stanley to run the sale.
(Reporting by Elzio Barreto; Additional reporting by Jessica Yu and Donny Kwok in Hong Kong and Rushil Dutta in Bengaluru; Editing by Edwina Gibbs)
Read the original article on Reuters. Copyright 2017. Follow Reuters on Twitter.

CBA: China spent around $72 billion defending the yuan last month

CBA: China spent around $72 billion defending the yuan last month

Photo: Getty Images.
In attempt to mitigate continued capital outflows from the country, China’s central bank, the People’s Bank of China (PBOC), likely spent around $US72 billion to defend the Chinese yuan in December, according to calculations from the Commonwealth Bank of Australia (CBA).
In a note released on Monday, Wei Li, China and Asia economist at the bank, said that while China’s FX reserves decreased by only $US41 billion to $US3.01 trillion in December, the level of net capital outflows, and subsequent intervention from the PBOC, was nearly twice as much.
“According to our calculations, valuation effects — changes in FX reserves caused by exchange rate fluctuations and investment returns — resulted in an increase of $US35 billion in China’s FX reserves in December. However, the gain was more than offset by negative transaction effects that totaled $US79 billion in December,” said Li.
In other words, we think the scale of the PBOC’s support for the CNY in the FX market — by selling US dollars — has increased in December.
Li estimates that net capital outflows likely accelerated last month, rivaling those seen in December 2015 and January 2016 when investors were seriously concerned about the health of the world’s second largest economy.
“Assuming a trade surplus of $US45 billion, we estimate China saw net capital outflows of $US93 billion in December,” he says.
This chart from the CBA shows how that figure ranks in terms of past outflows recorded. With the exception of late 2015 and early 2016, the estimated capital outflows seen in December was the highest level on record.
However, as opposed to the reaction seen this time when markets were crumbling, Li believes there’s a simple explanation as to why investors are more sanguine to the acceleration in capital outflows seen this time around.
It’s largely due to expectations that the US economy will strengthen, rather than that the Chinese economy is weakening.
“What is different this time is that a broad-based USD strengthening, triggered by Trump’s win of the US presidential election and higher US interest rates, appears to be the major cause of rising capital outflows from China into the USD, resulting in a weaker CNY,” he says.
You could also argue that relative stability in China’s stock market — something that was not present at this point last year — may also be contributing to the markets relaxed attitude to the latest acceleration in Chinese capital outflow.
Even with the PBOC’s intervention in the FX market during December, the US dollar still strengthened by 0.86% against the yuan, leaving its gain in 2016 at nearly 7%.
While the US dollar has weakened against the yuan late last week — largely as a result of a broader pullback in the greenback and further intervention from the PBOC in the offshore traded yuan market — it’s clear that downward pressure on the yuan remains firmly entrenched.
USD/CNY Daily Chart
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GOLDMAN SACHS CHIEF ECONOMIST: There are 3 big risks for 2017

GOLDMAN SACHS CHIEF ECONOMIST: There are 3 big risks for 2017

cliff_jumping_goproKeith Mui
LONDON – The second half of 2016 will probably be remembered for its geopolitical shocks and uncertainty rather than as a period of benign economic data.
But to do so would be to only have half of the story.
According to Goldman Sachs' measures of economic activity, the last two quarters of 2016 were really pretty encouraging.
"If you look at economic data for the past few months, there's been an impressive acceleration in growth," Jan Hatzius, the chief economist at Goldman Sachs, said in a speech in London on Monday.
Here is the chart:
Gs2aGoldman Sachs
"What lies behind this pickup in growth? We think two things," Hatzius said. "Number one; an easing of financial conditions. We've seen in general easier conditions in 2016 as compared with 2015, especially when the impact on growth is concerned."
"Also we've started to move into mildly positive territory as far as fiscal policy is concerned," he added. This trend could continue into 2017, especially if the Trump administration in the US cuts taxes and raises spending.
Here is Hatzius again:
"One of the big questions of the Trump administration is how much additional fiscal policy stimulus are we likely to see? Now our expectation is that there will be corporate tax reform and some individual tax cuts. We're not building in the full proposal in our numbers, but something around half of that in our numbers.
"The tax cuts will be constrained because the US is already running a fairly high deficit. But nevertheless we expect an annual fiscal easing of $200 billion annually. We think that will take effect on growth at the end of 2017."
But Hatzius said there were three key risks to that optimistic outlook for the year. His presentation was capped at 20 minutes, and so he summed them up in a sentence each.
Here they are:
1. Trade protectionism: "Associated with the transition to the Trump administration, a hard turn towards protectionism. That's definitely something that we've got our eye on that I think is a downside risk to the global economy."
2. European politics: "While Europe has improved there's still some significant problems, especially in the labour markets of the southern European economies."
Here is how that political schedule stacks up:
GS3aGoldman Sachs
3. China: "China continues to see very rapid debt growth and increases in the debt to GDP ratio so we would have to have a close look at signals from China, especially as far as capital flows are concerned and this is a major focus of our Asia economics team."
Here are those China debt charts:
GS5aGoldman Sachs

Saturday, January 7, 2017

Warren Buffett brilliantly explains how bubbles are formed

Warren Buffett brilliantly explains how bubbles are formed

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warren buffettWarren BuffettAP Images
In an interview with the Financial Crisis Inquiry Commission (FCIC) back in 2010, Warren Buffett answered several questions about what he thought caused the housing and credit bubble.
During the interview process, he also gave a crystal clear explanation of how bubbles are formed.
It's a great read for anyone interested in investing or behavioral economics.
The interview comes from a recent document dump from the National Archives, which released transcripts, meeting agendas, and confidentiality agreements from the FCIC. The group was set up in the aftermath of the crisis by Congress to look into the causes of the event.
Anyway, here's Buffett (emphasis ours):
"... My former boss, Ben Graham, made an observation 50 or so years ago to me that it really stuck in my mind and now I've seen evidence of it.
He said, 'You can get in a whole lot more trouble in investing with a sound premise than with a false premise.'
If you have some premise that the moon is made of green cheese or something, it's ridiculous on its face. If you come out with a premise that common stocks have done better than bonds [... that] became the underlying bulwark for the [1929] bubble. People thought stocks were starting to be wonderful and they forgot the limitations of the original premise [....]  So after a while, the original premise, which becomes sort of the impetus for what later turns out to be a bubble is forgotten and the price action takes over.
Now, we saw the same thing in housing. It’s a totally sound premise that houses will become worth more over time because the dollar becomes worth less. [...]
And since 66% or 67% of the people want to own their own home and because you can borrow money on it and you're dreaming of buying a home, if you really believe that houses are going to go up in value, you buy one as soon as you can. And that’s a very sound premise. It’s related, of course, though, to houses selling at something like replacement price and not far outstripping inflation.
So this sound premise that it’s a good idea to buy a house this year because it’s probably going to cost more next year and you’re going to want a home, and the fact that you can finance it gets distorted over time if housing prices are going up 10 percent a year and inflation is a couple percent a year. Soon the price action – or at some point the price action takes over, and you want to buy three houses and five houses and you want to buy it with nothing down and you want to agree to payments that you can’t make and all of that sort of thing, because it doesn’t make any difference: It’ s going to be worth more next year.
And lender feels the same way. It really doesn’t make a difference if it’s a liar’s loan or you know what I mean? [...] Because even if they have to take it over, it's going to be worth more next year. And once that gathers momentum and it gets reinforced by price action and the original premise is forgotten, which it was in 1929.
The Internet was the same thing. The Internet was going to change our lives. But it didn't mean that every company was worth $50 billion that could dream up a prospectus.
And the price action becomes so important to people that it takes over the — it takes over their minds, and because housing was the largest single asset, around $22 trillion or something like that, not above household wealth of $50 trillion or $60 trillion or something like that in the United States. Such a huge asset. So understandable to the public – they might not understand stocks, they might not understand tulip bulbs, but they understood houses and they wanted to buy one anyway and the financing, and you could leverage up to the sky, it created a bubble like we’ve never seen."

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