China Weekly: Rate Hike Rhetoric Continues Apace; M&A Activity Surges in 2010
According to a recently released report by PricewaterhouseCoopers (PwC) China has set a record in overseas merger-and-acquisition activities in 2010. The report shows that Chinese companies launched 4,251 merger-and-acquisition deals, both domestically and overseas, a 16% increase from 2009. The total value of these deals reached $200 billion an increase of27% from the previous year. Lu Yubiao, a partner in PwC’s M&A department said “the overseas resources sector is the main target for Chinese M&As, fueled by the country’s rising resource demand to support the rapid economic growth”. Lu also said that Asia, Africa, Australia, the EU and US markets are major destinations for Chinese capital. Adding that Chinese buyers have a growing appetite not just in the resources sector but also for overseas high-tech, equipment manufacturing and automobile enterprises. The report also showed that “the Chinese government is encouraging private-equity (PE) funds in an aim to channel capital flow into competitive private sectors” according to Li Ming, partner at PwC. PwC data shows that PEs were involved in 580 M&A deals in 2010, up 66% from 2009, and are playing an increasing role as the source of Chinese M&A deals. Li said that Chinese M&A activity is likely to remain active in 2011 as the country’s 12th Five-Year Plan for the period from 2011 to 2015 is set to continue encouraging domestic industry consolidation and overseas cooperation. It is our opinion too that Chinese companies will continue to exhibit strong interest in M&A deals related to highly qualified overseas assets due to the country’s surging demand for technology investments and natural resources.
On the interest rate front an adviser to China’s central bank, Li Daokui, told reporters that it would be “understandable” if interest rates would rise as part of adjustments to policy during the quarter. As Beijing focuses more inflation and less on maintaining fast economic growth an interest rate hike in the first quarter may well be forthcoming. Li said that he expects China’s trade surplus as a percentage of GDP to ease to 3.3% in 2010 from 5.8% the year prior and estimated further easing to around 1% this year. In terms of overall growth he forecast an expansion of 9.5% this year but added that 8.5-9% would be a more sustainable rate of growth. These lower forecasts have been largely accepted by the central banks, and as mentioned above they are likely shifting their focus away from maintain fast growth but rather combating mounting inflationary pressures in the economy. With many now forecasting crude to top $100, or even $120, this year energy prices remain a serious concern for the central bank when assessing policy. Chinese markets are set to return later in the week from their New Year’s holiday break and we expect further rhetoric about rate hikes to follow. Whether the PBOC will in fact tighten rates remains to be seen, they may elect to use a RRR hike or some other tool to try and drain liquidity out of the economy. We remind readers that we have discussed in the past the merit of hiking interest rates in a nation with an already high savings rate.
Written by Jonathan Granby, DailyFX Research Team
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