Tensions Beyond Trade

by
Marc Chandler
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Chinese officials do not seem to appreciate the extent of its isolation. The disruption from the US as Trump positions the US as a revisionist power-one that wants to alter the world order, which it was instrumental in constructing, may have obscured the fact that China’s practices are a source of frustration and animosity broadly and widely. Chinese officials do not seem to understand why Europe, for example, does not want to join an alliance to resist US protectionism. Nor do they seem to recognize that the basis for an anti-Chinese coalition remains and a change in the US could help bring one into fruition. Many investors and policymakers are focused on trade, but trade is a relatively shallow form of intercourse. Trade patterns can change rather quickly. China’s tariffs on US soy will see it buy more Brazil soy. Brazil’s surplus soy may be exhausted in a couple of months. Europe will buy more US soy, and some countries in Asia may commit some land to grow soy. Direct investment is a larger and more durable commitment. It is here that another front in the competition between China and others has opened. China’s seemingly insatiable appetite for mining and technology assets brought closer scrutiny by Australia and Canada, for example. China’s Geely took a  $9 bln stake earlier this year in Daimler, through the derivative market, allowing it to avoid regulatory requirements, shocked many investors. In 2016, a Chinese company bought a German company that made robotics systems for autos and aerospace. It spurred a backlash.

USD/CNY, August 01 - Click to enlarge

Overshadowed by ideas that a trade war between the US and Europe was avoided in masterful political theater, Germany moved in the clearest way yet to resist China’s direct investment initiative. First, ahead of last weekend, Germany announced that the state-owned development bank, KfW had acquired a 20% stake in a German transmission company, which the State Grid Corporation of China had targeted. Second, the German government blocked a Chinese company purchasing a German machine tool company, claiming it risks “public order and safety” without elaborating.

Germany approved legislation last year that made it easier for the government to block foreign acquisitions of strategically important companies if “public order or safety” was jeopardized. While the legislation may have been aimed at China specifically, it could have broader application. Other EU countries, including the UK, France, and Italy either announced plans to enhance government power to block acquisitions or have taken action to do so. Earlier this year, France blocked a Chinese consortium from buying Toulouse airport.

In the US, the White House and Congress have worked together to broaden and strengthen the review process for foreign acquisitions, including minority stakes. The Trump Administration had initially appeared to be moving toward singling out China but in the end opted to strengthen the vetting process in general, which seems more consistent with the Trump Administration’s emphasis on economic competition per se, not ideological similarities or differences.

China wants capital inflows. They want to transfer technology, best practices, and jobs. Direct investment inflows can also blunt the capital outflows, which are partly being restrained by capital controls. However, China cannot simply allow other countries to take measures against its investments without having reciprocal powers. To this end, China’s Commerce Ministry has drafted rules that require national security review for “strategic” investments by foreign companies.

To balance its signal to foreign investors, China reduced the amount of total assets foreign investors must have to qualify to purchase a strategic stake in a listed company to $50 mln from $100 mln. Also, the lock-up period for listed shares following an acquisition by foreign investors has been slashed from three years to one. There is a public comment period until the end of August, and some are concerned that a one-year lock-up period is too short. That said China effectively blocked Qualcomm’s bid for NXP. China was the only jurisdiction that did not approve the US company takeover of the Dutch chip-maker.