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China to accelerate outbound investment in agriculture For over a decade, China has been the world’s largest FDI recipient, but its role in the global investment market was negligible until the mid 2000s when Lenovo Group completed its 1.75 billion USD purchase of IBM's PC division and China acquired the minority stake in US-based BlackStone for 3 billion USD. Now, China’s overseas investment is beginning to catch up. According to The Chartered Bank, China’s outward investment in CY 2009 is estimated between 150-180 billion USD whereas total FDI (foreign direct investment) within China is estimated to total between 80-100 billion USD in the same year. There are several main drivers for the recent boom in overseas investment by Chinese companies. First of all, the global economic downtown has led to a significant discounting in assets in the western hemisphere, particularly in the US. Meanwhile, the Renminbi has appreciated over 17% against the US dollar since 2005. Another factor influencing outbound deal flow stems from the fact that Chinese authorities are encouraging SOEs to use some of their massive foreign exchange reserves to acquire natural resources and commodities abroad and diversify away from low-yielding US dollar-denominated government securities. The third reason is China’s changing direction of economic development. The government’s strong encouragement of Chinese companies’ overseas investment in cutting-edge technologies and high value-added segments reflects China’s serious aspiration to create and own intellectual property in order to shed the popular image of being a cheap producer. Obviously, acquisition is the fastest way to upgrade because it not only helps to improve market presence abroad, but also allows transfer in technology and management expertise. Compared to investment in energy, utilities and mining, accounting for 93% of total outbound deal valuations, China’s investment in the agricultural sector has just started. The worldwide food shortage has spurred China’s enthusiasm to invest in the overseas agricultural sector. China has spent billions of dollars leasing or buying foreign farm land to safeguard its food security, but opposition in those countries is so fierce that some deals cannot be implemented. In contrast, investment in other agricultural subsectors is more sustainable and welcome. One of the most eye-catching Chinese company’s overseas acquisitions in agriculture recently is COFCO’s acquisition of Smithfield’s stakes. COFCO, one of the largest Chinese agribusiness groups and dominant in mainland China’s grain trade, paid about 63 million USD for a 4.9% stake in Smithfield Foods Inc. in 2008, and agreed to acquire Maverick Food Ltd, a JV between Smithfield and Belgium’s Artal, in December 2009. China, the largest pork consuming country, imports approximately 1 million tons of pork annually and Smithfield , in late 2007, started selling pork to China as part of China's policy of expanding imports from the United States. COFCO will consolidate production along the US model, boosting its production from the current 500,000 to 10-15 million hogs within five years. Another deal worthy of note is China-based Shanghai Alliance Investment Ltd. (SAIL)’s 16.8 million USD investment in Fort Collins, Colorado-based Solix Biofuels in 2009. Solix is focused on commercializing microalgae-based fuels on a large scale and SAIL's capital contribution will increase development opportunities for Solix in Asia. SAIL is an international investment group funded by the state-owned Assets Supervision and Administration Commission of the Shanghai municipal government. SAIL’s investments center on entities that have the potential to be deployed in China. There are about 100 Chinese agribusiness companies listed in domestic and foreign exchanges, and many of them are sitting on large cash balances. They have the ambition, scale and potential to buy out foreign assets. Given the rapid growth of the China agricultural sector in recent years and its strategic goals, it is no surprise that more Chinese agribusiness companies will seek overseas investment opportunities to secure access to supplies of commodities, to strengthen R& D capabilities and to gain access to new markets.
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