Sam Fleming: Economic View Go back »

2011-01-10 | All chapters

Sam Fleming: Economic View
The Times, 10th January 2011

The Vice-Premier sounded reassuring. “China will look into the market and carry on buying,” Li Keqiang told his Spanish counterparts during a trip to Madrid last week. It was the latest soothing statement to come from China about its appetite for eurozone bonds. The financial markets may be losing faith in the debt of stricken countries such as Portugal, but Beijing is an avowedly eager buyer.

Mr Li’s cavalcade arrived yesterday in Scotland, where he visited a tidal power plant before talks with David Cameron. His country’s appetite for Western assets does not stop at sovereign debt — far from it. Its state-dominated businesses are eager to hoover up other EU assets, not least high-tech companies.

After all, the vast savings at Beijing’s disposal have to be diversified. The risks attached to Western government debt mean that China wants to invest in less brittle assets. It is also a state priority to take hold of foreign advanced technology through any means, including acquisition.

Mr Li’s visit to Madrid brought the signing of 16 business agreements worth $7.5 billion (£4.8 billion). These involved shipments of Spanish ham, wine, olive oil and other goods, but far and away the largest deal was the $7.1 billion purchase by the state oil company Sinopec of a 40 per cent stake in Repsol Brazil, part of Spain’s Repsol energy giant.

Such deals mark the tip of the iceberg. Projections from the Bank of England suggest that China could account for 40 per cent of total G20 savings by 2050, while America’s share slides to 5 per cent. More and more of this investment firepower will be ploughed into Western companies.

What should Europe’s response be? Governments can hardly decline badly needed foreign capital. But there has to be a nuanced response, especially to takeovers of high-tech and strategically important companies. Last week the Chinese group Xinmao withdrew a $1.3 billion offer for the Dutch industrial cable maker Draka, one of whose subsidiaries is a contractor for the American military. Xinmao implausibly blamed problems securing approval from Beijing, but it was opposition from European politicians that caused the problem. Xinmao had tried to snap up a technologically sensitive EU company with what one official calls a “disproportionately” generous offer. This rang alarm bells and within weeks the deal was off.

In Brussels, Antonio Tajani, the European Industry Commissioner, is planning to establish a new body with powers to review and block foreign takeovers of strategically significant European businesses. “Chinese companies have the means to buy European enterprises with key technologies in important sectors,” Mr Tajani has said. “It is a question of investments, but behind that there is also a strategic policy, to which Europe should respond politically.”

The sensitivities are underlined by the spying affair at Renault amid fears that cutting-edge technology could have gone to China. The model that Mr Tajani is looking at is the Committee on Foreign Investment in America, which has the power to review and block takeovers of strategically prized companies.

Mr Tajani’s calls for a more sceptical response to Chinese takeovers have triggered concern among EU companies operating in Asia, which prefer a softly-softly approach. In the UK, politicians will look askance at such interventionism. Britain prides itself on its openness to foreign investment, which has been a boon for the economy for decades. But debate over foreign takeovers in the UK is dominated by the vested interests of the City, which wants to see as many deals done as possible. In an ideal world, governments would be indifferent to questions of corporate ownership and nationality, but Germany, France, Australia and, of course, China are far from agnostic on the matter.

America, a paragon of free-market virtue, has repeatedly repelled Chinese takeovers when they are inimical to its broadly defined national interests. Britain needs to formulate a coherent approach of its own.

For example, ARM Holdings, one of Britain’s most important technology companies, lists SAFE, the state custodian of China’s foreign exchange reserves, as a minority shareholder. What would be Britain’s attitude to a full-blown takeover bid for a company such as ARM by a Chinese giant?

The issue is germane at present because the UK will shortly end a consultation review into its takeover laws. The legal hurdles to purchase of companies are seen by some as too low after the Kraft-Cadbury furore. But the review would do well to address some of the bigger questions associated with the highly politicised world of Chinese investment.

Of course, Britain should maintain its positive attitude to capital inflows. Where would the automotive industry be today without foreign capital? But Chinese approaches for high-tech, cutting-edge companies must be scrutinised closely, and not just when defence interests are directly at stake. What’s more, quid pro quos are badly needed.

According to the EU Chamber of Commerce in Beijing, progress opening up China’s huge telecoms market remains threadbare ten years after Beijing joined the World Trade Organisation. One telecoms industry source I spoke to described the barriers to Western investment there as “outrageous”.

Mr Cameron’s message to Mr Li should be that while Britain cautiously welcomes Chinese investment, market access must be a two-way street.