China’s investments prompt call for new rules
Wall Street Journal | January 6, 2013
China’s investments prompt call for new rules
By BOB DAVIS
Beijing
Chinese companies are expected to invest more overseas in 2013. As the WSJ’s Bob Davis tells us, the trend is set to continue but not without resistance from countries who view Chinese investment as a threat.
The political furor that accompanies many overseas investments by China Inc. is easy to understand. What to do about the investments is a lot more complicated.
Unlike private companies, China’s state-owned enterprises serve two masters: the Communist Party and private shareholders. And the party holds the trump card, because it, not the board, appoints CEOs. Western policy makers suspect such investments may be a "potential Trojan horse," as the U.S.-China Economic and Security Review Commission put it last fall.
According to the U.S. congressional commission, state-owned companies accounted for 90% of the value of Chinese investments in the U.S. industrial-machinery, aerospace, automobile and logistics industries between 2007 and the third quarter of 2011. Some deals by state-owned firms in 2012 were especially controversial. A bid by a Chinese firm with links to Beijing’s municipal government to buy the bulk of U.S. aerospace company Hawker Beechcraft Inc. fell apart because of the U.S. government’s national-security objections.
Canada approved a bid by state-owned Cnooc Ltd. 0883.HK -1.75% to buy Canadian energy concern Nexen Inc., NXY.T -0.52% but warned that further purchases by Chinese state-owned companies of Canadian oil-sands assets would be approved only under "exceptional" circumstances.
Even figuring out which Chinese operations qualify as state-controlled can be tough. U.S. government officials suspect that China’s military has significant influence over a number of big privately owned Chinese companies.
Barring investments from such companies would be a loser economically, cutting off wobbly economies from a rich source of funding. Instead, the U.S. is trying to use negotiations over a Pacific free-trade pact, called the Trans-Pacific Partnership, to formulate rules governing the behavior of state-owned concerns.
China isn’t a party to the talks, but the U.S. hopes Beijing would ultimately agree to whatever limitations the pact imposes on state-owned companies so Beijing could become a TPP member and benefit from tariff cuts and other deals the parties strike.
But that may be a pipe dream. With China on a trajectory to become the world’s largest economy in a decade or two, Washington’s leverage is seeping away like a bike tire with a slow leak. While the abbreviation "TPP" would produce a "huh?" reaction even from the wonkiest of Washingtonians, it has become a bête noir in Beijing. Chinese officials see the TPP as one more example of Washington’s trying to encircle it with unfriendly neighbors.
A commentary by state news agency Xinhua described TPP as "a blunt instrument to block India and China from equal access to key Pacific Rim markets." Huang Huaguang, who heads the Chinese Communist Party’s international development research office, said flatly in an interview that "the objective of the TPP is to exclude China."
Robert Kimmitt, a longtime Washington lawyer who served as deputy Treasury secretary in the Bush administration, is quietly talking up an alternative: create a round of negotiations to deal specifically with the issues raised by state-owned companies. The talks would be patterned after the 2008 negotiations involving sovereign-wealth funds—huge government-owned investment funds—which were then seen as stalking horses for foreign governments looking to further their agendas, especially Russia, China and countries in the Middle East.
The sovereign-wealth-fund talks were held under the auspices of the International Monetary Fund and produced what are known as the Santiago principles, for the Chilean city where the agreement was struck. The funds committed to invest for commercial, not political, purposes; disclose more about their operations and investments; and abjure "inappropriate influence" by government owners. Outside analysts rank the funds’ compliance with the principles.
The effort tamped down criticism of the funds in Western countries, which were eager for sovereign-fund investments after the global financial crisis. Christopher Balding, a sovereign-funds expert at Peking University’s HSBC business school, said these funds now are more willing to release annual reports and other information. The Santiago principles were part of the funds’ efforts to adopt "best international practices," he said.
A negotiating round involving state-owned companies would be far more complicated. About two dozen sovereign-wealth funds negotiated the Santiago principles. There are so many state-owned firms that governments from around the world would have to be at the conference table, making a deal tougher to reach. The U.S., Europe and Japan have their own state-owned companies—the Tennessee Valley Authority in the U.S., for example—not just China, Russia and other nations that have a heavy state presence in the economy. The advantage: The negotiations would be tougher to characterize as the U.S. and its allies ganging up on China.
Given the importance of state-owned concerns to global trade, the World Trade Organization—an organization more or less trusted by all parties—would probably make more sense than the IMF as a venue for such talks.
Mr. Balding said such talks should try to create rules to limit government subsidies, especially for financing, and to commit state-owned companies to invest for "market principles," not political concerns.
Mr. Kimmitt said the governments should "open up sectors from which state-owned entities emanate," so those sectors don’t give companies a domestic monopoly. In China, state-owned companies dominate the energy, banking, transportation, communications, electricity and tobacco markets, among others.
"The more open to outside firms those sectors are in China, the more opportunities Chinese firms will find for successful acquisitions in those sectors abroad," Mr. Kimmitt said.
Neither China nor the U.S. is ready to move ahead yet. U.S. Undersecretary of State Robert Hormats said that while "broad guidelines as to how state-owned enterprises can develop their operations on a commercial basis might be worth pursuing," he wouldn’t commit to talks. Mr. Huang, of the Chinese Communist Party’s international development research office, was more wary. He said he thought such talks would be "discriminatory and a reflection, to some degree, of a fear of competition" from China.
But as China’s state-owned giants continue to face resistance overseas, China may warm to negotiations, especially if Beijing’s new leaders keep their word and try to open the state-owned sectors to competition to strengthen China’s economy.
Write to Bob Davis at bob.davis@wsj.com
