China Gobbles Up More Foreign Companies

CNBC
Published: Tuesday, 26 Jul 2011 | 5:55 PM ET

China is mounting a foreign takeover offensive, fueled by a stronger currency and worries about one of its prime holdings, US Treasurys, as the debt debate drags on in Washington.

Mergers and acquisitions between Chinese companies and foreign entities have jumped 29 percent so far this year, to a record 217 deals worth $24.3 billion, according to Dealogic.

“If you don't understand the sausage making that is American Democracy and don't like the impact the resulting debt ceiling mess might inflict on your portfolio of Treasury securities, then equities and real estate are a better option,” said Scott Nations of NationsShares.

China’s currency – the yuan – hit a record against the dollar Tuesday, boosting the country’s ability to make deals. While still controlled by the government, the restrictions on the yuan have been loosened enough to allow it to climb 6 percent versus the dollar in the last year.

There have been a record 33 deals worth $2.3 billion announced between China and American companies, second only to the $4.5 billion China has spent buying Australian companies.

“Prior to 2005, China’s reserves were held, almost exclusively in dollars and U.S. Treasuries,” said Jim Iuorio, managing director for TJM Institutional Services. “Since then, there has been a small, but noticeable move to diversify China’s holdings, and what we're seeing in outbound M&A activity is a manifestation of that.”

China is the biggest foreign holder of U.S. Treasuries at $1.2 Trillion. The payment of interest on those securities currently hangs in the balance as Republicans and Democrats fight it out in Washington.

Iuorio also points out that it is no coincidence that they are targeting commodity rich nations such as Australia, as well as the U.S., so they can lock in supply for their rapidly expanding domestic economy.

To be sure, the deal activity is relatively small in comparison to Japan’s U.S. takeover spree in the 1980s that culminated in the announced sale of the iconic Rockefeller Center to Mitsubishi Estate Company of Tokyo. The deal would later fall through. Plus, China will face more regulatory scrutiny than Japan did two decades ago.

“I think they are more into hoarding resources than trophies,” said Karen Finerman, president of Metropolitan Capital Advisors and a ‘Fast Money’ trader.