THE DISTILLERY: Chinese charge

Jotters mull the implications of China's State Grid Corporation power swoop, with one flagging an element of sovereign risk for state governments.

As the new week begins, expect more discussions around the news that China’s State Grid Corporation has picked up a range of Australian energy assets from Temasek Holdings’ Singapore Power. Without a word escaping to the press, these assets have gone from a Singaporean sovereign wealth fund to a Chinese state-owned enterprise.

Does it matter if the assets are owned by a state-controlled entity from China as opposed to Singapore? The answer is both not really and absolutely.

The Australian Financial Review’s Chanticleer columnist Tony Boyd points out that state-owned enterprises, from wherever, are treated differently by the Australian Foreign Investment Review Board.

“The Chinese have, in one fell swoop, acquired two of the three biggest energy utility companies in Australia. This gives them an influential seat at the table as state governments come under intense pressure to manage the public backlash from increasing energy prices. That public pressure introduces an element of sovereign risk to the transaction. But the Chinese would have been well aware of the recent moves by South Australia and Queensland to cap rises in consumer prices for energy.”

Perhaps, like many global investors, part of the strategy is simply the attractive, reliable returns generated by a state-regulated utility. If these assets were being floated, we’d have the Canadians knocking as well.

Business Spectator’s Stephen Bartholomeusz says the transaction is nonetheless unusual, but then again, State Grid Corporation is a bit weird.

“What’s interesting about the deals is that, despite their scale and the fact that it would have a majority interest in SPI (Australia) Assets, State Grid is effectively taking up portfolio interests in both of them, with Singapore Power remaining the operator of the SPIAA business. State Grid is the world’s largest utility company which describes its core businesses as the investment, construction and operation of power networks. Its operations span about 88 per cent of China’s landmass and represent the world’s largest power grid. It is also regarded as a world leader in ultra-high voltage technology and smart grids. In other words, it has considerable experience and capabilities in building, owning and operating major energy networks and ought to be more than capable of managing SPIAA’s businesses.”

And Fairfax’s Malcolm Maiden has a solid command of Singapore Power's history to point out that this shift was probably a while coming.

“The deal, if cleared, will ‘right-size’ Singapore Power’s Australian exposure after earlier unsuccessful attempts. It was clever in the ‘90s as the Kennett government secured first-mover prices for Victorian energy assets, limiting itself to kicking the tyres as other groups, including America’s Texas Utilities, paid up. In 2004 it paid a more realistic $US3.7 billion for TXU’s entire Australian energy portfolio, and in 2005 got about $2.2 billion back by selling power generation and retailing assets in the TXU portfolio to the Kadoorie family’s Hong Kong-based China Light & Power group. It sold 49 per cent of the remaining assets later that year for about $1 billion by publicly floating the business as SP Ausnet and was sitting pretty, but in 2007 succumbed to boom fever, and joined with Babcock & Brown for the $7.4 billion Alinta acquisition. Later in 2007 as the global financial crisis expanded, it tried and failed to sell the Alinta assets into SP Ausnet, and has since been overweight in Australia.”

In other big international corporate news, the revelation that the seemingly unemployable former BP chief executive Tony Hayward has taken interim chairman duties at Glencore Xstrata as the Xstrata board members are shown the door caught some onlookers by surprise to say the least.

The Australian Financial Review’s Matthew Stevens indicates that this is just the beginning.

“The bloody shake-out of Glencore Xstrata continues apace with Thursday’s nightmare on Zug’s Artherstrasse confirming that Swiss mining’s biggest merger was actually a takeover and that the tough times have only just begun for a corp of miners that crewed Mick Davis’s former corner of the empire…Glencore Xstrata’s first annual meeting at the Theatre Casino on the shores of Lake Zug will be remembered for much more than its debut status. Because somewhere along the way a company that is 25 per cent controlled by its executive managed to lose a chairman and four more directors in what looks for all the world like a coup of stunning efficiency."

Fairfax’s Ross Gittins breaks down the myth that cutting spending is the way to bring the budget back to surplus. First of all, you can increase taxes. But secondly, and more importantly, both sides are hopelessly vulnerable to the positive and negative swings of the economy.

Fairfax’s Kenneth Davidson (and The Distillery loves this bloke) explains this debate from the perspective of the economy, not the budget, and makes it sound so damn simple.

“In a period of uncertainty, when individuals and private business decide to rein in their spending, unless the government steps in to fill the gap, incomes fall and unemployment rises. The art of budgetary policy in this situation – which was clearly the case in 2008 after the global financial crisis and is arguably the case now when there are strong prospects of another global depression – is to assess the size of the potential deflationary gap and therefore the net increase in spending (expenditure less revenue) needed to sustain full employment and avoid recession.”

Fairfax’s Michael West sarcastically runs through the ‘crisis point’ that Australia is at with its interest rates and its unemployment and its economic growth and its debt levels. All those things are fine and dandy. Please, can we stop this madness.

Perhaps it’s the enduring strength of the economy that has many onlookers puzzled as to why the deficit is not shrinking. Remember, the east coast of Australia is either in recession or booking pathetic growth numbers.

So what’s the answer? West is right, we’re not in crisis. But things aren’t so good that the budget should be rapidly returned to surplus via cuts.

That’s not to say there isn’t room for cuts… Do you see how this debate is somewhat circular and perpetually irritating?

Meanwhile, The Australian’s economics editor David Uren ponders the significance of a deflationary force that “appears to be gathering strength,” posing some big questions for the Australian economy.

And finally, The Australian’s John Durie reports that Australian Pharmaceuticals Industries boss Stephen Roche piled on the Labor government, as have many business leaders during this term of government, saying at a lunch in Melbourne last week that September 14 can’t come quickly enough.