IFR Asia – November 25, 2017

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

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.

20 International Financing Review Asia November 25 2017

People

&Markets

Such

braggadocio

exercises

in financial

leverage

signal a

system which

is sick on

something

JONATHAN ROGERS

experiences Beijing’s

appetite for western

brands first-hand

COMMENT

1019_05 People and Markets.indd 20 24/11/2017 22:03:34