The deal was one of the first to show that flows across the Pacific, especially in the tech sector, are now two-way flows. Even as Silicon Valley looks for the next idea to take to the world’s biggest mobile internet and ecommerce market, Chinese investors are making increasingly significant investments in the US to compensate for weakness back home. Beijing has invested heavily in creating semiconductor manufacturing capacity on the mainland but that capacity has been underutilised, hampered by a lack of high quality chip designers. By acquiring OmniVision, which designs and makes chips for the image sensors used in cameras (including the iPhone), the group is acquiring human capital that will make China ever more competitive in high-end manufacturing.
Moreover, the Chinese investors, which include Hua Capital Management, Citic Capital and GoldStone Investment, have a plan to ensure the acquisition makes financial as well as economic sense. Ultimately, they plan to take OmniVision, which was listed in the US, and relist it back in China. That is because semiconductor companies are out of favour in the US, while the Chinese love the sector.
In executing the plan, the Chinese are in some ways taking a page from the US private equity playbook. Blackstone, for example, made a fortune by taking companies private that were unpopular in their home market and relisting them after a decent interval on markets which looked upon them more positively. Blackstone did this, for example, with Frankfurt-listed Celanese, a chemicals company, 10 years ago.
True, the plan was conceived well before the China market began its dramatic ascent — though who knows where the market will be when OmniVision finally makes its debut in Shanghai. The rally in Shanghai has seen shares gain 113 per cent in the past year and almost 30 per cent just since the beginning of March. Even the local brokerage firms have had a hard time accounting for that unanticipated rise. The best guess of Chris Wood of CLSA Securities, which is now part of Citic, has to do with “the potential trigger of [state-owned enterprise] reform via strategic mergers, as well as the growing focus going forward on SOEs of improving bottom line over top line growth”.
But as always with the Chinese market, technical factors are a more convincing part of the explanation than fundamental ones. When the economy was on fire, the stock market was in the doldrums. Now, with fears intensifying that all is not well on the macro level, the stock market is maximum bullish. It has ignored concerns that corporate earnings will come under increasing pressure, and over possible defaults from firms with dollar borrowings and no dollar earnings, notably weaker property developers.
The People’s Bank of China has cut interest rates three times in recent months, with more cuts likely in an effort to cushion slowing growth — driving up the market in the process. But even more
“It remains clear that the Chinese government wants to promote a bull market in stocks, in part to generate a wealth effect among shareholders in the context of an economy which clearly continues to slow as China (adjusts) from investment-driven to consumption-driven growth,” Mr Wood says. Every day, there is some story