Who Is the Chinese Buyer of Hummer?

Sichuan Tengzhong Heavy Industrial Machinery Corporation shot to international fame overnight after the little-known Chinese firm appeared in a press release from General Motors as the buyer of its Hummer business unit. After some research, we found out that Tengzhong is a privately held engineering firm that specializes in road and bridge construction equipment, with no obvious experience in the manufacturing and distribution of commercial vehicles. The firm has a registered capital of CNY 300 million ($44 million) according to official records from the local government, and about 4,800 employees, mostly in southwestern China's Sichuan Province. Although the private firm does not release any sales figures officially, we managed to find some media reports that said Tengzhong's 2008 revenue was about CNY 1.6 billion, and the firm paid CNY 20 million in taxes.

As more details emerged about Tengzhong, it has become clear that Tengzhong has little experience in either commercial vehicle business or overseas operations to make the Hummer business a success. In addition to its lack of experience, we see other major obstacles as well. Although Hummer has strong brand recognition in China, particularly among the newly rich, the low fuel efficiency of the gas-guzzling vehicle is in fundamental conflict with China's long-term strategy to develop smaller, more fuel-efficient cars. Another reason that we believe the government may frown on the deal is that this unexpected move from Tengzhong adds further complexity to China's highly fragmented auto industry. China is looking to consolidate more than 80 carmakers into a few "national champions" that have the research capability and scale to compete on the global market. If a firm with no commercial vehicle can easily enter the auto industry with an acquisition, how can the government convince the already-reluctant existing carmakers to consolidate?

As the Hummer deal is estimated to exceed $100 million, it requires review and final approval from the Ministry of Commerce. At the moment, the ministry has yet to make its view public, but interestingly, we noticed that China's two leading news media, Xinhua News Agency and People's Daily, have both carried articles expressing skepticism about this deal's feasibility. Citing the recent failure of Shanghai Auto (a major Chinese carmaker) in managing its acquired Korean business, one article warned that Tengzhong is ill-equipped to manage the Hummer business and to address unfamiliar issues ranging from local regulations to labor unions. That does not bode well for Tengzhong.

Market Recap
The Chinese stock market continued to move up for the week ended June 5, thanks to a number of policies aimed at boosting growth in the manufacturing sector, as well as new government subsidies for electrical appliance purchases. Over the past five trading days, the Shanghai Composite Index rose by 4.6% to 2,754, while the Shenzhen Composite Index rose by 5.3% to 10,667.

Financial
Chinese Mutual Fund Managers Raised CNY 100 Billion in the First Five Months
A total of 41 new funds have been launched so far this year, raising CNY 2.47 billion on average. The average size of the new funds is about 36% larger than in the year-ago period, indicating a recovery of investor confidence as the Chinese stock market has risen by 50% year to date.

Goldman Sold ICBC Shares for $1.9 Billion
 Goldman Sachs (GS) sold about 3 billion shares of Industrial and Commercial Bank of China (ICBC) after the lockup period for these shares expired. In March, Goldman affirmed its intention to remain ICBC's long-term strategic investor. It still holds a 4% stake in ICBC. In the same week, ICBC announced that it plans to acquire a 70% stake in the Canadian business of the Bank of East Asia Canada for about $73 million, as the bank looks to expand in North America.

China Investment Corporation Invests $1.2 Billion More in Morgan Stanley
After this investment, the $200 billion sovereign fund of China will have an approximately 10% stake in  Morgan Stanley  (MS). The fund had invested $5 billion in the bank's convertible securities back in December 2007.

Hong Kong Stock Exchange Appoints New Head
Li Xiaojia, the chairman of  J.P. Morgan (JPM) in China, will assume the top role at the stock exchange next January, after the current CEO Paul Chow retires. Li confirmed that he will leave J.P. Morgan to take up the new position. The Hong Kong stock exchange expects to tap his banking experience and government relations to attract more Chinese companies to raise capital on the Hong Kong market.

Technology
China Unicom Slashes 3G Services Fees to Expand Market Share
 China Unicom , China's second-largest wireless operator, recently announced that it will remove all roaming fees and additional charges on domestic long-distance calls for 3G service users. Such roaming fees and charges can add up to a fairly large sum, especially for business travelers, an attractive segment that Unicom wants to win over from its larger rival,  China Mobile . In addition, Unicom will not charge 3G users for any incoming calls. The operator has an aggressive expansion plan for its 3G services and plans to cover 230 cities this year.

Google's Market Share in Chinese Webpage Search Queries Fell to 21% in 1Q
According to local research firm iResearch, this is the first quarterly market share loss for  Google (GOOG) in China in the past year, after three quarters of steady market share gain at the expense of  Baidu (BIDU). At the recent peak, Google accounted for 23% of Chinese webpage search queries, while Baidu accounted for 72%.

Basic Materials
Chinalco's Bid to Buy 18% of Rio Tinto Was Rejected
The $19.5 billion offer from the Chinese aluminum firm would have been the largest overseas acquisition of a Chinese firm. This high-profile deal was aborted partly due to strong resistance from the public and the regulators in Australia, although a few smaller acquisitions of Australian mining and resource companies by Chinese firms did go through this year.

Energy
China Raised Prices on Gasoline and Diesel by 6%
Gasoline and diesel prices have gone up by CNY 400 ($58) to about CNY 6,930 and CNY 6,190 per metric ton, after China's fuel price regulator announced the price hikes on its Web site at the beginning of June. Fuel prices in China are periodically adjusted by the regulator to reflect oil price changes on the global market. In May, the regulator said it will consider adjusting fuel prices if the moving average of a crude basket changes by more than 4% over 22 trading days.

Peter Liu contributed to this article.