Chinese Port Operators Step Up Investment Overseas

 Feb. 6, 2013 11:40 a.m. ET

HONG KONG—China's state-owned port operators are stepping up their investments abroad, taking advantage of depressed prices as a global shipping downturn forces companies elsewhere to cut debt by unloading assets.

Extensive investment and development of China's port infrastructure in recent years have helped drive growth at such companies as China Merchants Holdings (International) Co. 0144.HK -0.77% and the ports unit of shipping conglomerate China Ocean Shipping (Group) Co. Now that growth is slowing at home, the companies are using their port-operations expertise to expand abroad.

China Merchants, a unit of the China Merchants Group conglomerate, last month agreed to pay €400 million ($543 million) to buy a 49% stake in port operator Terminal Link SAS from French container-shipping company CMA CGM, which was reducing debt.

Weeks earlier, China Merchants, the country's biggest port operator by container shipping volume, acquired a 23.5% stake in the Port of Djibouti. China Merchants in 2011 took control of a container port development in Colombo, Sri Lanka, and raised its stake to 85% last year.

Access to capital is supporting the overseas investment drive, says Lars Jensen, chief executive at consulting firm SeaIntel Maritime Analysis. China Merchants' parent, for example, also controls China Merchants Bank Co. 600036.SH +0.51% , the country's sixth-largest lender by assets.

"Prices for some of these stakes have come down considerably compared to just prior to the [global] financial crisis," Mr. Jensen says.

As China's trade boomed, the country's port operators invested in developing domestic container and bulk terminals. By last year, six of the world's 10 busiest ports were in China, according to the Journal of Commerce, with Shanghai holding the top spot.

But port volume growth in south China's industrial hub, which clocked in at more than 20% before the global financial crisis, has eased to the low-to-mid single digits in the past few years.

Cosco Pacific Ltd. 1199.HK -0.36% , the ports unit of China Ocean Shipping, in 2009 won a 35-year right to operate the Greek port of Piraeus, part of Beijing's efforts to support euro-zone countries during the financial crisis. Greek media reported recently that Cosco is considering taking a controlling stake in Piraeus. Cosco Pacific—which also has operations in Singapore; Antwerp, Belgium; and Port Said, Egypt—declined to comment.

Among other Chinese port operators, Shanghai International Port (Group) Co. has a 25% stake in the Belgian port of Zeebrugge.

For China Merchants, the CMA CGM deal gives access to a diversified port portfolio of 15 terminals in eight countries, including Morocco, Belgium and the U.S. The deal also strengthens the Chinese company's relationship with the French shipping line. The companies signed a 12-year agreement in which CMA CGM's container ships will increase calls at China Merchants' ports.

The overseas push by Chinese port operators also comes as Beijing seeks to strengthen economic ties with developing nations in Southeast Asia and Africa. For those emerging markets, which have been recording double-digit annual export growth, upgrading infrastructure such as ports is important to luring foreign investment.

Indonesian state-owned port operator PT Pelabuhan Indonesia II last year said it was in discussions with China Merchants to develop a $2 billion container and iron-ore terminal on the Indonesian island of Batam.

China Merchants Deputy General Manager Wang Zhixian declines to comment on specific deals but says the company will continue to consider investments abroad.

Growth in emerging markets is partly the result of a shift of some factory activity away from China. "Many manufacturers that produce low-end products, such as shoes and clothes, have been relocating their production bases from [China] to places like Cambodia, because of cheaper labor costs.…The trend is irreversible," says Lawrence Li, a regional shipping and ports analyst at brokerage firm UOB KayHian.

Meanwhile, though, Chinese operators remain leagues away from global rivals in terms of geographic coverage. And political resistance against increased Chinese economic influence presents an obstacle to expansion in many Western countries.

In the late 1990s, Cosco's parent company was blocked on national-security grounds from building a container terminal on the site of a former U.S. Navy base in California. More recently, China Merchants shelved plans to invest in a large port in Vietnam because of a territorial spat between the two nations.

But most political obstacles can be overcome, says SeaIntel's Mr. Jensen. "The U.S. is the only place where I see a genuine concern and that is more down to domestic politics…than anything else," he says.