Money will not be an issue for Chinese companies planning to shop overseas thanks to a policy allowing domestic commercial banks to offer loans for mergers and acquisitions (M&A).
China's banking regulators lifted restrictions last December making it possible for Chinese commercial banks to help finance M&A activities of Chinese companies both at home and abroad.
As of the end of March, five Chinese commercial banks had issued a total of 7.6 billion yuan worth of new loans to support 10 different companies' M&A deals within China, said Huang Yi, an official from China Banking Regulatory Commission (CBRC).
This figure doesn't include lending for international acquisitions such as the US$21 billion of syndicated loans the Aluminum Corporation of China (Chinalco) secured from four Chinese banks to support its investment in global mining company Rio Tinto.
On Feb 12, China's State-controlled metal giant Chinalco signed a US$19.5 billion deal with Australia's Rio Tinto that will eventually double its stake in the world's second largest mining company. This is by far the largest overseas investment by a Chinese company.
The loan arrangement includes a US$19.5 billion loan for the transaction and US$1.5 billion to finance ongoing working capital and other expenditures linked to the deal, Chinalco said.
The four banks that supported Chinalco's acquisition include two State-controlled commercial banks - Bank of China and Agricultural Bank of China, China Development Bank and Export-Import Bank of China.
Based on their 2008 earnings report, Chinese commercial banks can provide a total of 900 billion yuan worth of loans for M&A activities. The CBRC regulations mean that a Chinese bank's outstanding M&A loans cannot exceed 50 percent of its core capital.
In addition to securing funding for their acquisitions abroad, Chinese companies would also be able to get favorable interest rates for the loans, just as Chinalco did from the four Chinese banks.
According to loan documents filed with the US Securities and Exchange Commission, Chinalco would pay just 90 basis points, less than 1 percentage point over the benchmark six-month London Inter-Bank Offered Rate, known as the Libor.
The interest rate is considered highly competitive compared with the 345-point spread over Libor that BHP Billiton, the world's largest mining company, recently agreed to pay on a five-year bond and the 390-point spread it paid on a 10-year bond.
One of the main purposes of allowing commercial banks to finance Chinese firms' M&A activities is to support the Chinese government's call for domestic companies to "go global", an official from the CBRC said when announcing the new rules.
The global financial crisis could prove a great opportunity for Chinese companies to expand their presence abroad, according to some analysts.
The market value of the world's mining and metal companies has dropped about 40 to 60 percent due to the global economic downturn, presenting a great chance for Chinese mining and metals firms to pursue overseas acquisitions, global consultancy firm Ernst & Young said in a report.
The largest domestic mobile phone operator China Mobile and insurance giant China Life both expressed interests in acquisition opportunities overseas as assets abroad became cheaper.
Homegrown carmakers such as Chery Automobile, Changan Auto and Shanghai Automotive Industry Corp, have been frequently mentioned as potential bidders of Ford's struggling Volvo unit.
(China Daily April 20, 2009)
