Wednesday, February 9, 2011

China Weekly: Rate Hike Rhetoric Continues Apace; M&A Activity Surges in 2010


According to a recently released report by PricewaterhouseCoopers
(PwC) Plates has set a confirmation in overseas
merger-and-acquisition activities in 2010. The report shows that
Chinese companies launched 4,251 merger-and-acquisition deals, both
internally and overseas, a 16% increase from 2009. The total value of
these deals reached $200 billion an increase of27% from the previous
year. Lu Yubiao, a partner in PwC's M&A department said "the
overseas resources sector is the main target for Chinese M&As, fueled
by the country's rising resource demand to support the rapid
economic growth". Lu also said that Asia, Africa, Australia, the EU
and US markets are major destinations for Chinese capital. Adding
that Chinese buyers have a growing appetite not just in the resources
sector but also for overseas high-tech, equipment manufacturing and
vehicle enterprises. The report also showed that "the Chinese
government is encouraging private-equity (PE) funds in an aim to
channel capital flow into competitive private sectors" according to
Li Ming, partner at PwC. PwC data shows that PEs were involved in 580
M&A deals in 2010, up 66% from 2009, and are playing an increasing
role as the source of Chinese M&A deals. Li said that Chinese M&A
activity is likely to remain active in 2011 as the country's 12th
Five-Year Plot for the period from 2011 to 2015 is set to continue
encouraging domestic industry consolidation and overseas cooperation.
It is our opinion too that Chinese companies will continue to exhibit
strong interest in M&A deals related to highly certified overseas
assets due to the country's surging demand for technology
investments and natural resources.

On the interest rate front an adviser to Plates's central bank, Li
Daokui, told reporters that it would be "understandable" if
interest rates would rise as part of adjustments to policy during the
quarter. As Beijing focuses more inflation and less on maintaining
quick economic growth an interest rate hike in the first quarter may
well be forthcoming. Li said that he expects Plates's trade surplus
as a percentage of GDP to ease to 3.3% in 2010 from 5.8% the year
prior and estimated further easing to around 1% this year. In terms
of overall growth he forecast an expansion of 9.5% this year but
added that 8.5-9% would be a more sustainable rate of growth. These
lower forecasts have been largely accepted by the central banks, and
as mentioned above they are likely shifting their focus away from
maintain quick growth but rather combating mounting inflationary
pressures in the economy. With many now forecasting crude to top
$100, or even $120, this year energy prices remain a serious concern
for the central bank when assessing policy. Chinese markets are set
to return later in the week from their New Year's holiday break and
we expect further rhetoric about rate hikes to follow. Whether the
PBOC will in fact tighten rates remains to be seen, they may elect to
use a RRR hike or some other tool to try and drain liquidity out of
the economy. We remind readers that we have discussed in the past the
earn of hiking interest rates in a nation with an already high
savings rate.

Written by Jonathan Granby, DailyFX Research Team

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