Small Chinese companies seek overseas investment
BEIJING: As domestic Chinese stock markets wither and credit tightens, more of the smaller, fast-growth Chinese firms like Puda Coal are looking overseas for investors.
China's army of small and medium-size enterprises, known as SMEs, makes up as much as 70 percent of the country's economic output but has been hit disproportionately hard by government steps to slow rampant investment and soaring inflation.
"SMEs in general have a huge hurdle to clear to secure bank lending and investment in China," said Tian Wenwei, vice president of Puda, a supplier of coking coal, used in iron and steel making. "But with steel prices rising, we have had no problem finding foreign investors."
Foreign funds now own 35 to 40 percent of Puda, which has said it is eyeing a Nasdaq listing, even as domestic share flotations have been going through a rough patch.
Chongqing Machinery & Electric shares fell 19 percent on their debut this month in Hong Kong, putting a damper on other issues.
While it is difficult to track SMEs because investments are often less than $50 million and fly under the regulatory radar, those that deal with the vast and varied sector are upbeat.
"China is still a hot investment place," said Kent Kedl, the head of consultancy in Shanghai for Technomic Asia, which helps U.S. and European clients find investment partners in China.
Kedl said that a quarter of the deals he closes were now some form of merger or acquisition, and that he expected that to grow to two-thirds in the near future.
Announced cross-border deals for mainland companies tripled to $48.6 billion in 2008 through June 18, according to Thomson Reuters data. In comparison, such deals in Asia Pacific, including Japan, rose 8.9 percent to $350.3 billion.
"The real funds that understand China are still hungry for investment," said Joseph Meuse, founder and managing director of Belmont Partners, a specialist in U.S. reverse mergers. "How could you not be interested in a company growing at 30 percent?"
Belmont helped Shanghai Medical Technology raise $12.5 million earlier this year in a reverse merger, a move that helped the Chinese company secure an over-the-counter listing much faster than the traditional initial public offering route.
Meuse, now involved in opening a consulting firm in Shanghai to increase the deal flow to Belmont, said the U.S. financial turmoil would have a small impact on business this year.
The Chinese economy has shown resilience even as the U.S. economy stands on the brink of recession and global markets are battered by soaring oil prices and the credit crisis.
To prevent overheating, China has raised banks' required reserve ratio 17 times in a two-year monetary tightening cycle and ordered banks to limit new loans this year to 2007 levels.
In other moves aimed at smaller firms and to encourage the production of higher value-added goods, Beijing has reduced export subsidies and stiffened pollution standards.
But the less stringent bookkeeping and opaque ownership structure that often characterize Chinese SMEs can turn due diligence into a lengthy exercise for investors.
"These are pretty nervous people," said Kedl of his clients.
Direct investors are not the only ones looking to China. As investor appetite for global public offerings has slowed, the world's bourses are competing more aggressively for business from China.
The biggest stock market operator in Canada, TSX Group, said last month that it was looking to open an office in China - its fastest-growing source of new listings - which would be its first outside North America.
TSX is home to most of the world's listed mining and energy companies, key target sectors for resource hungry China. TSX is hoping for 25 to 40 listings annually from China within five years, compared with seven last year.
It is not alone. The London Stock Exchange opened a Beijing office in January, following similar moves by the New York Stock Exchange and Nasdaq.
But despite the attention they are attracting, most of China's SMEs will find it difficult to secure overseas backing.
"The larger and better managed SMEs will be able to attract foreign investors, but there could be millions of them," said Tang Min, the deputy secretary of the China Development Research Foundation. "The government needs to open access to big state banks to improve their funding channels."
Tuesday 24th of June 2008