Deal driver

China Daily (Hong Kong) - - FRONT PAGE - By ZHENG YANGPENG Zhengyang­peng@chi­

China will adopt fis­cal and fi­nan­cial in­cen­tive mea­sures to en­cour­age con­sol­i­da­tion in a num­ber of in­dus­tries, a min­is­ter says.

China will use fis­cal and fi­nan­cial in­cen­tives to en­cour­age con­sol­i­da­tion in a num­ber of in­dus­tries, Min­is­ter of In­dus­try and In­for­ma­tion Tech­nol­ogy Miao Wei said on Mon­day.

In a sign of shift­ing pol­icy fo­cus, Miao said that in­stead of manda­tory, ad­min­is­tra­tive-ori­ented con­sol­i­da­tion, the in­dus­try reg­u­la­tor will do more to cre­ate a sounder en­vi­ron­ment for merg­ers and ac­qui­si­tions. “We should re­frain from the heavy-handed ap­proach of the planned econ­omy time, when ‘forced mar­riages’ were pushed by the govern­ment and vi­o­lated com­pa­nies’ will,” he said. “In­stead, we should fos­ter a bet­ter en­vi­ron­ment for M&As.”

He pro­posed a num­ber of pos­si­ble mea­sures. On the fis­cal front, the heavy cor­po­rate in­come tax bill as a re­sult of M&A trans­ac­tions is one ex­am­ple.

“In the as­set val­u­a­tion process prior to M&A deals, cor­po­rates’ as­set val­ues usu­ally rise. The in­creased value is sub­ject to a chunk of cor­po­rate in­come tax. We had given some ex­emp­tions be­fore on a case­by­case ba­sis. In the fu­ture, we should change this to a uni­ver­sal pol­icy,” Miao said.

On the fi­nan­cial front, loan terms for M&A should be ad­justed. Ma­tu­ri­ties could be longer, he said.

Also, bet­ter ar­range­ments should be made with ref­er­ence to GDP and fis­cal rev­enue in or­der to en­cour­age cross-re­gional con­sol­i­da­tion, he said.

Cross-re­gional M&As in cap­i­tal-in­ten­sive sec­tors such as steel are ex­tremely dif­fi­cult, as re­gional govern­ments are re­luc­tant to let go for fear of los­ing GDP and fis­cal rev­enue.

Miao made the com­ments when re­spond­ing to China Daily’s ques­tion on whether there will be new con­sol­i­da­tion moves for the dairy, rare earth and steel in­dus­tries. He steered away from elab­o­rat­ing on spe­cific in­dus­try poli­cies.

Con­sol­i­da­tion in China’s dairy, rare earth and steel in­dus­tries is be­ing closely watched, as these sec­tors are ei­ther re­lated to food se­cu­rity, the global ap­petite for strate­gic ma­te­ri­als or over­ca­pac­ity.

In June, the govern­ment said it aimed to re­duce the num­ber of do­mes­tic milk pow­der man­u­fac­tur­ers to 50 from 127 and nur­ture 10 large dairy en­ti­ties with an an­nual in­come of more than 2 bil­lion yuan ($329 mil­lion) to take over 70 per­cent of the mar­ket in five years.

Au­thor­i­ties said they want to con­sol­i­date the do­mes­tic milk pow­der sec­tor to in­crease the abil­ity of Chi­nese com­pa­nies to com­pete with in­ter­na­tional ri­vals. In­ter­na­tional brands have made in­roads in the do­mes­tic mar­ket since a highly pub­li­cized scan­dal hit con­sumers’ con­fi­dence in do­mes­tic com­pa­nies’ qual­ity.

For the rare earth sec­tor, Su Bo, deputy min­is­ter of In­dus­try and In­for­ma­tion Tech­nol­ogy, said in Septem­ber that a ma­jor con­sol­i­da­tion could take place be­fore the end of this year.

Global de­mand for China’s rare earths has prompted ram­pant il­le­gal min­ing and smug­gling.

The phe­nom­e­non be­came so preva­lent that the amount of rare earth me­tals ex­ported from China in 2011 was 2.2 times higher than the of­fi­cial amount recorded by Chi­nese Cus­toms.

The ram­pant il­le­gal min­ing also caused en­vi­ron­men­tal degra­da­tion, prompt­ing the govern­ment to push for­ward in­dus­try con­sol­i­da­tion as a way to solve the prob­lem.

Pre­vi­ous reck­less ex­pan­sion also re­sulted in se­vere over­ca­pac­ity in steel and other in­dus­tries. Pres­sure to rein in over­ca­pac­ity was height­ened af­ter heavy haze blan­keted much of China. Pol­lu­tants from steel mills are con­sid­ered a fac­tor in gen­er­at­ing the haze.

Miao said the cen­tral govern­ment has or­dered a ban on any new projects in the steel, ce­ment and elec­trolytic alu­minum in­dus­tries. In China’s three ma­jor met­ro­pol­i­tan ar­eas, new ca­pac­ity should be less than elim­i­nated ca­pac­ity. In other ar­eas, new ca­pac­ity should be no more than elim­i­nated ca­pac­ity.

Miao also vowed to ful­fill the task of “phas­ing out out­dated ca­pac­ity in 19 in­dus­tries” one year ahead of 2015, when the task is sup­posed to be real­ized.

“Hope­fully, the cen­tral govern­ment’s de­ter­mi­na­tion can have some ef­fect, but I am not op­ti­mistic about the short- to medium-term prospects,” said Liu Ying’ai, an an­a­lyst with China Chengxin In­ter­na­tional Credit Rat­ing Co Ltd.

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