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The anticipated megamerger of ChemChina and Sinochem implies there is a common thread linking China’s planned economy and countries with freer markets. China says it wants to reduce production capacity. Takeovers in mature industries in Europe and the US often have the same motive. But it would be a mistake to pursue parallels too far.
An implicit aim of some consolidators in the west is to remove capacity so as to raise prices. Antitrust watchdogs may try to block aggressive efforts to reduce competition, but deal doers still pray that better pricing will lift margins, in tandem with cost cutting. That should be easier in basic industries such as steel, aluminium and chemicals. China has a lot of these, but it may balk at tightening output to raise prices, preferring to subsidise output that cannot make a decent return.
Chinese media has been extolling government efforts to cut capacity. Easy to envisage the combination of ChemChina and Sinochem to create a group with sales of some $100bn as part of that plan, alongside a rumoured mash-up of state energy groups.
In the US and Europe the invisible hand of the market drives consolidation rather than puppetry by party bosses. Bayer is buying Monsanto for $66bn and Dow is merging with DuPont. ChemChina connects the two worlds through its $43bn acquisition of Swiss crops specialist Syngenta.
A granular conspiracy theory concerning that deal dispels any broader belief in a Chinese efficiency drive. This nominates Syngenta as an asset rich enough in technology for China to covet, but best owned by an acquirer less erratic and indebted than ChemChina. Moody’s estimates the deal will raise ChemChina’s net debt from 8.6 to 11.4 times earnings before interest, tax, depreciation and amortisation. The rating agency believes Sinochem has a ratio of just over 6 times. That is steep by western standards, but unexceptional for a Chinese state-owned enterprise. Merging the two would leave Syngenta’s new owner less perilously leveraged and perhaps more obedient.
The closure or mothballing of domestic factories would be low on the agenda, say Chinese bankers. The government would merely have propped ChemChina up against a marginally more sober tippler at a bar where the strong liquor of leverage was still flowing freely.
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