The Big Sale
Asian governments, especially those flushed with cash and no longer content with the meager returns to be had on safe but low-yielding investments like Treasuries, are becoming increasingly aggressive players on the equity front. It used to be just Singapore via Temasek and the GIC. They now have a new partner in China. The governments of China and Singapore agreed to invest as much as US$18.5 billion in return for stakes in the big British bankBarclays Plc. In doing so, Chinese lender China Development Bank and Temasek could play a role in the outcome of the biggest bank-takeover battle ever. That increasingly bitter contest pits Barclays against a consortium of European banks led by Royal Bank of Scotland Group PLC in seeking to acquire Dutch banking giant ABN Amro NV. Mind you, Temasek already controls Standard Chartered Bank Plc as well.
The Barclays deal is the latest in a string of investments in U.S. and European companies by governments in Asia and the Middle East. In May, the Chinese government invested US$3 billion in Blackstone Group on the eve of the U.S. private-equity giant's initial public stock offering. And last week, an investment fund controlled by the government of Qatar made a US$21.8 billion takeover approach for British supermarket chain J Sainsbury Plc. While potentially boosting their investment returns, such deals expose the government-controlled funds and other entities involved to risks that range from simple investment losses to political backlash.
There is an obvious trend in Asian governments getting sick and tired of holding overvalued USD assets, especially Treasuries. The recent sell down in USD is probably the start of a wave. There is greater reluctance to hold USD. Looking at the purchases, many tend to avoid US assets inpreference for European assets.
Judging from the size of available funds, its the Chinese new investing agency which will make bigger noises from here on. The close ties between Beijing and Singapore should see more initial hand holding with Temasek in scouring for big corporate deals. Two aggressive investing agencies with substantial firepower, that's likely to drive prices higher, especially for very decent sized assets. In a way, this will more than compensate for the reduced role in leveraged buyouts due to higher interest rates.
China Development Bank plans to invest as much as US$13.5 billion in Barclays, in what could become the largest overseas investment by a Chinese company to date. The planned investment is part of a broader deal that also includes as much as US$4.97 billion in funding from Temasek, and would enable Barclays to buttress its bid for ABN Amro. Should Barclays succeed in acquiring the Dutch bank, the deal ultimately could leave China Development Bank with a stake of about 8% in the newly enlarged Barclays, making it by far the biggest shareholder. Surprise, surprise, China's earlier investment in Blackstone Group has brought synergies. Guess who is advising China Development on the Barclays deal, yes, its Blackstone Group.
While this deal involved China Development, there will be an actual China state investment agency, which will be up and running come September. It will be called China Investment Co. Ltd, and will be tasked to make more profitable use of China's US$1.2 trillion in foreign currency reserves. The Finance Ministry will sell 1.55 trillion Chinese yuan (US$200 billion) in special government bonds in three to four tranches by next March to fund China Investment Co.
Judging from the funds available to these Asian governments (including those from the Middle East), the pool of candidates for investing purposes are not plenty. They can possibly only look at the top 500 in global market cap to plonk down US$10 billion or thereabouts for a substantial stake. That is exactly the strategy for Dubai International Capital (with US$6 billion under management), and they have had to navigate around another landmine - political backlash on senstive geopolitical assets. Dubai International just recently bought a major stake in HSBC Plc and then a 3% stake in Airbus maker European Aeronautic Defence & Space Co. , followed by a 3% stake in of India's ICICI Bank Ltd.
Political backlash on sensitive assets is nothing new. Last year, Dubai Ports ran into trouble when it tried to a British ports operator that operated several American ports ran into political obstacles. China's CNOOC also faced a brick wall when it tried to buy U.S. oil producer Unocal Corp.
Temasek now manages about US$85 billion in assets. Just imagine the firepower with China Investment Co.'s initial US$200 billion. Malaysia has been over building its reserves, now standing at well over 11% of GDP. Our need to reinvest back in the country is high, but at the same time a more aggressive strategy to invest in good regional companies will ensure for a well-rounded reinvestment plan.