Four dishes and one soup, with no alcohol. This was the meal symbolically consumed by Xi Jinping, China’s president, on a visit to Hebei province in 2012 as part of his crackdown on corruption among party officials. There should be no lavish hospitality or edible bribery, he signalled.
Foreign companies that want to acquire businesses in China face a similarly strict diet. There are few dishes on the menu and they are hard to swallow. It is quite unlike what Jörg Wuttke, president of the EU Chamber of Commerce in China, calls the “banquet” to which China is treated abroad.
Now, though, Germany may be calling a halt to its banquet or removing some of the dishes. It this week withdrew approval for a €670m takeover of chip-equipment maker Aixtron by Fujian Grand Chip, an investment fund. Together with regulatory delays to ChemChina’s proposed $44bn takeover of Syngenta of Switzerland, this suggests Europe is taking another look at the bill.
Caution is justified, not because there is anything wrong in Chinese companies buying abroad, but because Beijing sets up heavy obstacles for foreign companies doing the same in its own market. They range from legal limits on foreign ownership to a web of regulations and informal barriers.
Germany’s small and medium-sized companies are not the only target. Dalian Wanda has been on the buying trail in Hollywood, and HNA Group this week bid $6.5bn for 25 per cent of the Hilton Hotels chain. Chinese companies are no longer happy simply to manufacture clothes, toys and electronics and leave the clever stuff to others.
Some of these deals will end the same way as Japan’s acquisitions in the late 1980s, also encouraged by high asset prices and cheap money at home. Japanese companies overpaid for assets that they did not know how to handle and ran into trouble. But Germany shows why the surge in Chinese direct investment should be taken seriously.
Second thoughts about the Aixtron deal follow a series of acquisitions of German companies with advanced manufacturing technology. Kuka, a maker of industrial robots, was bought by Midea, a Guangdong manufacturer of household electronics, for €4.5bn this year. Chinese companies have also bought German makers of concrete pumps and machine tools.
There is no mystery as to why it is happening. The Made in China 2025 plan unveiled last year calls for China to move into advanced manufacturing in 10 industries, including machine tools and robotics, aerospace, medicine and information technology. If it cannot beat advanced companies in Germany or the US, it will acquire them.
This is not inherently sinister. It has advantages over China’s former tactic, which was to spark “indigenous innovation” by making European and US companies that wanted access to its home market form joint ventures with Chinese companies and transfer their technology as the price of entry.
The Chinese acquirers of German and US companies have to pay a hefty premium for sophisticated technology that they can then adopt. It is a more appealing approach than, for example, the way that Siemens, Kawasaki and Alstom had to share secrets to gain contracts for China’s high-speed rail network.
Nor is there any problem with China’s vaulting ambition. It cannot simply stay where it was as light manufacturing shifts to countries with lower wage rates, such as Bangladesh. It does not undermine the security of the west with its acquisition of expertise in robotics and advanced machine tools.
The irritation is that investment flows are becoming unsustainably one-sided. China’s economic rise and accession to the World Trade Organisation in 2001 opened a large trade gap, with China turning into the world’s biggest exporter of goods. Germany and other advanced economies used not to have to worry about imbalances in mergers and acquisitions, but now they do.
WTO accession was intended to bring global companies more access to China, and did so in sectors such as carmaking. But China maintains a plethora of formal and informal limits on foreign ownership in healthcare, logistics, telecoms and other industries. China Oceanwide was free this week to buy Genworth Financial, a US insurer, for about $2.7bn, but overseas insurers still have only a tiny market share in China.
Ownership limits had a legitimate purpose: to prevent China’s industries being trampled in a stampede of inward investment. But its rapid economic advance in the past 15 years has not led to much liberalisation: even when laws are relaxed, provincial governments and local officials favour Chinese companies in myriad ways.
Germany is in a tough spot, lacking any broad mechanism to control China’s advance: the EU has no equivalent of the Committee on Foreign Investment in the US, which investigates sensitive takeovers. The EU has pressed China to allow European companies easier entry but Beijing is a hard bargainer and the imbalance suits it well.
It cannot last. Either China serves more or US and European banquets will shrink. Regulations will be changed and deals will be blocked. Then everyone will have to live on less..
