China power giants go shopping in Europe

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China's cash-flush state-owned power companies are going on a buying spree abroad, scooping up bargains with virtually no political opposition as Europe looks to reduce its debts.

A quarter of Portugal's power grid operator, REN, will be sold to China's State Grid Corp for €387 million, part of a wave of privatisations Lisbon has to carry out under the terms of its €78-billion European Union/International Monetary Fund bailout loan.

On Wednesday (8 February), the State Grid News, the Chinese company's official publication, said the need by struggling economies to sell off state-owned assets "created entry opportunities" for China, and the deal would provide a springboard into other markets.

The State Grid isn't the first to take advantage of Europe's troubles, and is not expected to be the last.

The China Three Gorges Project Corp, operator of the world's largest hydropower project, also agreed last December to pay €2.7 billion for a 21% stake in the Energias de Portugal (EDP) utility.

"This is in line with the government's 'internationalisation strategy' for state-owned enterprises to 'venture out'," a senior power industry executive told Reuters, requesting anonymity to avoid repercussions.

"In the past, there were no such opportunities. Chinese power companies used to merely build power plants abroad. Now, we are investing, supplying equipment and helping to operate them. The timing is good," the executive said.

An official with State Grid said it was still too early to say whether Europe's debt crisis could lead to more deals.

"The economic situation differs from month to month and it depends if there are good opportunities," the official told Reuters.

However, Ken Su, a partner with PricewaterhouseCoopers in Beijing, said the crisis could help Chinese power companies in their attempts to acquire foreign assets, and more were likely in the next two years.

"In 2006-07, we started to see more activity in the power sector. Many of the deals haven't been completed and in general they take a long time to negotiate – a few of them have come through and it may be due to the prevailing economic conditions, which may be helping deals get done," he said.

China's foray into the overseas power sector began in 2009 when the Philippines sold a 25-year licence to a consortium led by China State Grid to run its power network. At $3.95 billion (€2.98 bn), it was the Southeast Asian nation's biggest privatisation deal.

The State Grid, China's biggest electrical utility, has already bought seven grid operators in Brazil for $1.7 billion (€1.28 bn).

Three Gorges chairman Cao Guangjing has said his company hopes to cooperate with EDP in eastern Europe and South America. Three Gorges has a dozen subsidiaries, including listed unit China Yangtze Power Co Ltd.

China 'better off buying physical assets instead of European or US bonds'

The promise of financing has helped smooth the path for cash-rich Chinese firms. China Three Gorges pledged to bring up to €8 billion for banks and other firms in Portugal.

"They have the financial ability and they tend to have strong balance sheets themselves or have access to Chinese lenders, and this could help the projects expand and develop. Many transactions could feature a financing element," said PwC's Su.

Resource-hungry China has invested heavily in mining and oil assets from Latin America to Australia in recent years, but it was not always smooth sailing.

A high-profile bid by offshore oil firm CNOOC for California rival Unocal was withdrawn in 2005 in the face of political opposition, and metals giant Chinalco was also spurned by Rio Tinto in 2009.

But there has been little opposition to Chinese power companies taking over foreign counterparts.

"When it is managed well, the local governments and local people can be very welcoming to a Chinese investor," said Su.

"I don't think there is one single overarching global sentiment despite the constant media attention about how active China is and how China is buying everything up."

The power industry executive shrugged off speculation of any ulterior motive, saying the takeovers were "purely profit-oriented".

"Our domestic market is limited," he said. "The (foreign) companies are profitable. There is no need to raise electricity prices. We cannot monopolise power generation and transmission because local regulators have the final say over price rises."

For China, snapping up physical assets outweighs buying European or US debt.

"We are better off buying (physical) assets instead of European of US bonds," a source with ties to China's leadership said, also requesting anonymity.

The State Grid's forays abroad could also provide respite from controversies at home. The sprawling state-owned firm has been fiercely criticised for running roughshod over regulators and earning huge profits at the expense of China's utilities. It has even been blamed for last year's power shortages.

The State Grid, which runs power transmission and distribution networks in 26 of China's 31 provinces, aims to achieve 62 billion yuan (€7.4 bn) in gross profit in 2012, up 16%, according to the China Securities Journal.

It plans to boost investments in China's power grids to 2.55 trillion yuan (€305.6 bn) in the coming five-year plan, up 68% from the preceding period, according to the China Securities Journal.

The European debt crisis is offering China an opportunity to 'take over Europe' by stealth bond purchases and strategic investments, exploiting internal divisions arising from the economic and financial crisis.

A 2011 report by the European Council on Foreign Relations, a UK-based think tank, claims that a lack of European cohesion has invited China to deal bilaterally with individual member states to exploit their divisions.

The think-tank claims that more than half of the total investment in Europe from China since early 2008 –  (€44 billion) – has taken place since October 2010. This figure will inevitably grow as Chinese overall direct investment is set to triple to $1 trillion by 2020.

  • 14 February: EU-China summit in Beijing.

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