Asia Sentinel

Beijing wants to focus resources on investing at home – an unwise idea

China is adding to recessionary forces and damaging its own interests by turning off the foreign investment tap after asset prices have plunged. The Asia Sentinel has learned that that the central government has issued a directive to mainland mining and mineral processing companies to freeze all overseas investments until they see a pick up in global business.

So the very companies which a few months, or even weeks ago, were buying up or planning to buy overseas mining assets at top-of-the-market prices are now unable to do so even though they are now in a much stronger position to negotiate more favourable prices.

In some cases companies may have been in danger of over-reaching themselves, borrowing heavily to buy into mines in Africa, Australia, Russia and assorted Asian countries. In all cases equity prices have crashed, not least those of the Hong Kong-listed mainland companies often viewed as the spearhead of investment overseas, particularly in the lesser-known metals such as molybdenum, wolfram and antimony. Hunan Non-ferrous Metals is down 90 percent from its peak, Xinxin Mining, a nickel producer, the same and diversified, Beijing-controlled Minmetals Resources, by 75 percent.

Beijing is arguing that at a time when domestic demand is decelerating all too quickly, it makes sense to focus resources on investing at home. However, given that China has more foreign reserves than it knows what to do with, and developing countries in particular are hoping that some of its will come their way into mining and industrial projects rather than helping bail out Wall Street by buying more US bonds.

While no one can tell whether commodity prices are close to their lows, China’s longer-term need for resource imports has barely diminished and in some cases mainland mining and processing companies have strong cash flows which would enable them to proceed with acquisitions without significant borrowing or issue of new equity. Although China is a major producer and exporter, in some cases a dominant one, of minerals (including the three above named), its own actual and potential production are unable to keep up with the growth of domestic demand. In some cases they now have more processing capacity than ore so are having to import. For this reason alone it makes sense to be looking overseas.

There is no indication of how long this ban will last, or whether some companies will be able to circumvent it by using cash held offshore or discreet foreign borrowing. But generally the pace not only of acquisitions but inquiries into opportunities has come almost to a halt.

Chinese caution may be understandable both in the context of uncertainty about the length and depth or recession and the realization that it may have overpaid for mining assets in the recent past, just as it overpaid for distressed western financial institutions. But it is a case in which what may make sense at the micro level makes no sense at all at the macro level where the need is for a revival of spending and of risk-taking, regardless of whether the investment is at home or abroad.

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