THE LEX COLUMN
THE LEX COLUMN
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The world's fastest-growing major economy continues to deliver. China's gross domestic product grew 9.5 per cent year on year in the second quarter, trumping forecasts and first-quarter growth. The country continues to act as a magnet for capital and as a favoured factory floor for multinationals. In spite of government efforts to cool the economy, first-half fixed asset investment rose an annualised 25.4 per cent while exports jumped 33 per cent.
Countries and companies who look to China for growth, however, cannot afford to be smug. Behind the rapid growth lies a swelling trade surplus, accounting for 5.3 per cent of GDP in the second quarter, compared with 0.3 per cent in the same period last year. That illustrates two weaknesses: China makes too many goods and domestic consumers do not buy enough. Softening domestic consumption is borne out by weaker retail sales growth and indicators, such as weak growth in oil demand which, at 2 per cent in the year to date, is well below consensus forecasts.
The optimistic view is that China will engage in a building frenzy ahead of the 2008 Olympics, fuelling demand for everything from cement to oil. But, conversely, a slowdown in Shanghai property and a turn in the investment cycle would quench demand. The data was accompanied by the usual rise in commodities stocks. But the correlation between commodity demand and Chinese growth looks weaker than it once did.
UnocalChevron blinked first. After a four-week stand-off since CNOOC joined the bidding for Unocal Chevron has inched up its offer to retain the board's recommendation. That keeps things on track for a shareholder vote on August 10. It also looks like a tacit admission that the gap between bids from Chevron and the Chinese oil group was too wide.
Before yesterday, CNOOC's cash offer enjoyed an 11 per cent premium to Chevron's cash and shares bid. Chevron has now increased its cash component and narrowed the gap to
6 per cent. Chevron can win at a discount, given the risk of the Chinese offer getting blocked. But if CNOOC raises its offer, the pressure will be on Chevron. There are real shades of the battle between Verizon and Qwest over telecommunications operator MCI. Then, Verizon reluctantly bid for MCI and made a strategic case for the deal. It then confirmed its interest by raising its bid, after Qwest's unwelcome intervention. Chevron is not going to raise by 27 per cent as Verizon was forced to do. But, having shown its commitment, it is unlikely to walk away. With CNOOC seemingly determined, and oil prices stubbornly high, Chevron could possibly be forced even higher. Unocal should be congratulated for kicking off an auction. Now it must keep CNOOC in the game. That means making it clear that Unocal is not wedded to a deal with Chevron and that the Chinese can win, at the right price.
Rio TintoEconomic cycles appear to be getting longer just ask Gordon Brown, the UK chancellor. Fortunately for the mining sector, China's economic expansion also appears to have more legs than previously feared.
Rio Tinto's 4.2 per cent share price rise yesterday owes more to strong Chinese growth than the company's production update. The latter showed Rio working at full capacity but facing infrastructure constraints. The Chinese data, however, could create room for earnings upgrades.
Concerns over the sustainability of the cycle have been reflected in rating compression. But, trading at 9 times 2006 estimated earnings, Rio's rating is now below historical peak multiples of 10-12 times. Judged on enterprise value to earnings before interest, tax, depreciation and amortisation, Deutsche Bank estimates Rio trades 37 per cent lower than its 10-year average.
Rio's traditional valuation premium to its large UK-listed peers has also disappeared. The perception of Rio as conservative may be partly to blame, but disciplined might be fairer. Rival BHP Billiton grabbed the headlines by outbidding Xstrata for Australia's WMC Resources. Rio, meanwhile, has quietly made a well-received, albeit smaller, Australian iron ore acquisition. A disciplined company in a cyclical business supported by valuation and buybacks is an attractive prospect. But, with 2006 likely to prove an earnings peak, steady rather than exceptional share price performance can be expected.
DanoneTakeover rumours are mouth-watering, especially once they appear credible enough to make politicians panic. But Danone's share price has risen almost 30 per cent during the past two weeks alone. Anyone offering a bid premium on top of that is likely to suffer from indigestion. Today's interim results should show healthy sales growth. But underlying profits could be much less impressive, in spite of last year's disposals and likely lower depreciation charges.
Over three years, capital expenditure as a percentage of sales has fallen by a quarter, even as growth accelerated. Scale benefits aside, two possible reasons are that Danone delayed investments or that capital intensity decreased. That suggests either shrinking barriers to entry and a margin squeeze or rising capital expenditure. Given the threats from discount retailers, it might be both.
Would-be bidders, such as bête noire PepsiCo, should avoid extrapolating recent trends, especially on cash-generation. Not that much of a deterioration is needed to make Danone look unappetising. The perennial takeover candidate is already trading at 22 times optimistic consensus earnings for 2005. That is quite high by any sane standard the odd food deal during the millennium bubble not withstanding. Add the risks of a French consumer backlash, political resistance and a managerial exodus, and it will take more than a few probiotic yoghurts to rebalance a buyer's intestinal flora.
LEX专栏：中国经济需要增加国内消费
中国这个全球增长最快的大型经济体继续表现出色。国内生产总值(GDP)第二季度同比增长9.5%，超出预测和第一季度增长速度。中国继续扮演着资本吸铁石的角色，且仍然是跨国公司青睐的生产基地。尽管政府采取措施给经济降温，但以年率计，上半年固定资产投资仍上升了25.4%，出口升幅则高达33%。
但那些指望中国带来增长的国家和企业则无法沾沾自喜。中国经济快速增长的背后，是贸易顺差的大幅飚升，其数额占第二季度国内生产总值的5.3%，相比之下，去年同期仅为0.3%。这说明了中国经济的两个短处：中国制造的产品太多，而国内消费还不够。零售额增长率下降就证实了国内消费的疲软，而石油需求等各项指标远低于普遍预测。今年迄今，石油需求增长率为2%，表现疲软。
乐观的观点是，中国将在2008年奥运会前狂热进行建设，这将推高它对水泥到石油等各种商品的需求。但相反，上海房地产市场增长放缓、投资周期出现逆转会抑制需求。这些数据也伴随着常见的大宗商品存量增长。但大宗商品需求与中国经济增长率的相关性看起来不如以前那么大了。
