What’s Behind the Biggest Foreign Takeover in Chinese History?

Last week I told you about Westfield’s $5 billion investment plan for the United States.

That’s serious money.

But suddenly $5 billion looks like chicken feed.

Now comes the news that the state-owned China National Chemical Corporation (ChemChina) has done a deal to buy farm chemical and seed giant Syngenta. That’s the world’s largest agrichemical company.

The price tag is $US43 billion.

It will be the most expensive foreign takeover in Chinese history. The dynamics under this massive deal trend could run for years.

Today’s Markets and Money explains why…

China’s minimum $1 trillion spend

If the polluted air doesn’t get you, the poisoned food just might.’

So opened an article on China from Post Magazine this month.

China has a major problem. It’s called pollution. The environment is so toxic after years of industrialisation and lax environmental standards that it’s literally killing the population.

You’ve probably heard some wild stories about China before. The baby formula laced with poison. The rivers that catch on fire or change colour. The dead animals that show up on riverbanks. Air pollution so bad that the rate of lung cancer in China is skyrocketing.

A Financial Times report last September suggested China needs US$1.1 trillion dollars to clean up its soil pollution alone.

Nearly one-fifth of its arable land is contaminated. China’s food supply is unsafe and the country knows it.

That’s a problem when you have 1.4 billion people to feed.

The race for the last wilderness on earth

That’s why it’s leading the race for natural resource assets all over the world.

China is building up a strategic presence in and around Antarctica. Antarctica is the last great untapped resources of protein in the world. It’s quiet, but it’s happening.

That’s why in 2014 Chinese Premier Xi Jinping visited Hobart in Tasmania.

He signed a five year accord for Chinese vessels and aircraft to resupply before they head further south.

China is already constructing five bases in Antarctica.

The New York Times reported in December on Antarctica,

China and South Korea, both of which operate state-of-the-art bases here, are ramping up their fishing of krill, the shrimplike crustaceans found in abundance in the Southern Ocean, while Russia recently thwarted efforts to create one of the world’s largest ocean sanctuaries here…

Chinese officials say the expansion in Antarctica prioritizes scientific research, but they also acknowledge that concerns about “resource security” influence their moves.

Food security is playing out in Aussie stocks

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How does the world feed China?

All this is with rising protein consumption of a richer Chinese middle class too, don’t forget.

The Financial Times cites a report from Boston Consulting Group suggesting that ‘upper middle class’ households in China will double in four years. This sector of the population is forecast to account for 81% of Chinese consumption growth.

According to the Australian Financial Review this morning, currently 30 million Chinese are eating Western style foods. It’s possible this could go up 10 times as high in three years.

That’s 300 million people.

As the FT says: ‘Now that ever more shoppers have the money to avoid the negative effect of all that pollution on their food, they are increasingly willing to drop a dime on doing so.’

According to the UN data, China currently produces one third less corn, wheat and other grains than the US.

That means the pollution problem is on top of the fact that a lot of China has a shortage of water and arable land anyway.

Put them together and you can see why China is going around the world looking for sources of safe, reliable food imports.

We can expect more deals like the Syngenta one. We can also expect this trend to keep playing out in the Aussie share market.

After all, this is the dominant trend behind the prodigious rise in 2015 behind vitamin group Blackmores [ASX:BKL] and baby formula company Bellamy’s [ASX: BAL]. And don’t forget agribusiness company Elders [ASX: ELD] doubling last year.

The biggest issue for the Chinese is trust. That’s a trend in Australia’s favour. Because the Chinese perceive our producers to have high quality supply chain management.

That means they will pay more for these products.

It’s also driving huge investments in beef producing ranches and land across Australia.

Every investor should be watching this sector. It will run for years.

Best wishes,

Callum Newman

Ed Note: This article was first published in Money Morning.

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Callum Newman

Callum Newman

Callum Newman is the editor of Markets and Money and Associate Editor of Cycles, Trends and Forecasts. He also hosts Markets and Money Podcast. Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect. To have Callum’s thoughts and insights on the current state of the currency, commodities and stock markets delivered straight to your inbox, take out a free subscription to Markets and Money here.

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