Late last week the Chinese government announced it would permit Baosteel, the country’s largest government-owned steel producer, to issue up to $1 billion in dim sum bonds in Hong Kong. For those of us not in the finance world, we might just yawn but for the fact that Baosteel serves as the very first non-financial services company from the mainland granted authority to raise money outside of China. We find the announcement interesting if only because China has picked a steel producer first. The move has significance both to global investors and also to the global steel industry for a number of reasons.
On China Becoming More Democratic
Though this move represents a big step for a country that has typically not opened up its companies to foreign investment, we can’t help but think this really only seems like a baby step. The notion of China opening up its markets to foreigners still appears, well, foreign. Bonds represent one form of investment. Equity investments represent quite another. And though we can commend Beijing for acknowledging that Baosteel could now potentially access cheaper funds as well as obtain better liquidity, we think Beijing’s motivations for the “loosening” of the grip has more to do with trying to remake the renminbi into “a global currency for trade and investment, as opposed to trying to help its companies access cheaper capital. Nonetheless, despite ulterior intentions, the move appears wise and long overdue.
What this Means for Global Steel
Perhaps the biggest implication has to do with both the industry and the company Beijing decided to change the rules for steel, and Baosteel in particular. We can speculate Beijing has a few reasons why and how it picked this company first to issue bonds outside of China. Companies raise money for all sorts of reasons, but we see Baosteel’s rationale as a three-legged stool acquisitions (as the Financial Times piece suggests), specifically the acquisition of resource companies; to lower its borrowing costs; and expansion. But if we peel the onion, so to speak, Baosteel may have other intentions, including acquiring new technology to compete in higher value-added steel product markets and/or increase its exports (either for higher value-add exports or lower value-added steel products, albeit more competitively).
Bonds of Baosteel vs. US Steel
Here in the US we take it for granted that when firms issue bonds, they do so in accordance with strict laws, regulations and with the support of the courts. The same does not apply to China. If a Chinese company says they will pay 3.3 percent on a bond payable in three years, what should a company or individual investor do if the company says, “Meh, whatever, we’ll pay you 2.8 percent in 4 years, or not at all. That may seem like a ridiculous statement, but laws of enforcement and methods of recourse differ between the two countries and investors should factor in the higher risk. Moreover, will the global investment community value a company like Baosteel, owned by the government, the way it would a company owned privately? The markets will tell us so shortly.
Arguably, with the amount of renminbi literally sitting around in Hong Kong bank accounts, this move at least provides some options to investors to decide how the money should flow as opposed to Beijing. And that’s probably a good thing.