Cheap eurozone takeaway fuels Chinese appetites

[BEIJING] The inexorable decline of the single currency offers ambitious Chinese firms a bargain buffet of eurozone business, analysts say, with this weekend's multibillion deal for Italian tyremaker Pirelli only the latest course in an acquisition binge.

Less than a year ago the euro was worth nearly US$1.40 on international markets. Earlier this month it stood at less than US$1.05, down by a quarter as the European Central Bank embarks on a massive stimulus programme while the US Federal Reserve is widely expected to start raising interest rates.

By the standards of first-world forex markets it ranks as a collapse.

It has recorded a similar performance against China's yuan currency, falling from almost 8.7 yuan in May to bottom at less than 6.6 yuan. The yuan trades in a tight range against the dollar.

As the unit weakens it makes eurozone acquisitions cheaper for outside buyers and its biggest headline impact may come in terms of Chinese overseas investment, which surged past US$100 billion for the first time last year.

"For Chinese going into Europe it can't get better than this," said Joerg Wuttke, president of the European Union Chamber of Commerce in China (EUCCC).

"Chinese companies are eager to go outside China as its own domestic economy is slowing down," he told AFP, adding that profit margins in the rest of the world are higher than in China, according to EUCCC member surveys.

"So I can only expect a major push from Chinese companies to buy into the European company landscape." The latest deal came with state-owned chemical giant ChemChina agreeing to buy out the largest shareholder in Pirelli, valuing the purveyor of Formula One accessories and racy calendars at just over seven billion euros - now about 48 billion yuan, or 13 billion yuan less than in May.

The euro has flirted with parity against the dollar in recent weeks - for the first time since 2002 - and while the euro rose to US$1.0964 on Tuesday it remained within striking distance of more-than-dozen-year lows.

China's overseas direct investment pushed sharply higher in February, the commerce ministry said, driven by oil giant China National Petroleum Corp putting nearly US$3 billion into a Dutch transaction.

"The continued slumps in the euro's value against the dollar have led the price of eurozone assets to fall, creating an opportunity for Chinese companies to invest and carry out mergers and acquisitions there," said commerce ministry spokesman Shen Danyang.

Beijing has accrued the world's biggest foreign exchange reserves and has been running record monthly trade surpluses, with the state-run China Daily newspaper saying in an editorial the country "is itching to invest overseas".

Private companies are also taking a seat at the table, with billionaire Wang Jianlin buying 20 per cent of Spanish league champions Atletico Madrid in January, the first mainland Chinese investment in a top European football club.

Conglomerate Fosun declared victory in February in its long takeover battle for French holiday resorts group Club Med, having repeatedly raised its offer to 939 million euros.

Klaus Meyer, a professor at the China Europe International Business School in Shanghai, said Chinese investing abroad generally take a long-term view and are driven by acquiring technology or brands they can exploit domestically.

"The fact that assets in Europe are now cheaper because of the weaker euro means that this sort of asset-seeking foreign investment is likely to increase," he said.

The Pirelli deal was met with dismay but resignation in Italy, and Derek Scissors of the Washington-based American Enterprise Institute said that given its economic travails, the eurozone will not look askance on inflows from China.

"Most Chinese companies are now sophisticated enough to back off of outright acquisitions when there is political sensitivity, buying smaller stakes in high-profile companies," he added.

Chinese firms may also already be taking advantage of the weaker euro to raise cheaper capital overseas.

Four China-based non-financial companies issued the equivalent of US$2.8 billion in euro-dominated bonds in January and February, according to Dealogic data, more than the US$1.9 billion raised in the whole of 2014.

Nonetheless the consequences of the euro's decline are not all one-way.

The 28-member EU is China's biggest trade partner while China is the EU's second-largest, and China ran a surplus of US$126.63 billion last year with the full group, nine of whose members do not use the single currency.

But the euro's decline makes eurozone goods cheaper elsewhere and Chinese products comparatively dearer.

"When it comes to trade certainly European exporters are going to be very happy as their products are going to be more competitive," Mr Wuttke said, while Chinese exporters will face tougher times.

"And so I expect actually that this trade imbalance that we have will narrow significantly as we go forward," he said.

AFP