Tag Archives: foreign investment

China’s New Foreign Investment Law: Many A Slip…

THE NEW FOREIGN Investment Law passed in March 2019 comes into effect on January 1, 2020. It will replace 1979-90-era laws on foreign-owned enterprises and joint ventures. These are no longer fit for purpose given the rebalancing of the economy from low-tech export manufacturing to high-tech sectors and domestic consumption, and the growing need to compete for foreign business investment with other countries in the region.

The new law also carries the high hopes of foreign firms for the protection of their intellectual property rights — copyrights, patents, trademarks, trade names, technical process, business secrets and goodwill — which it cannot bear.

Beijing needed to signal that China was improving its opaque and often closed business climate for foreign investors by putting them on the same footing as domestic investors and that it was listening to the grievances of trade partners, particularly the United States. Such complaints ranged from the forced transfer of intellectual property as the price of access to the Chinese market to exclusion from government procurement and patchwork implementation of existing legislation at the provincial and municipal level.

At the heart of the new Foreign Investment Law is the principle that foreign investors will be treated the same as domestic ones. That may have side benefits for company formation and flexibility in corporate governance; for example, the Byzantine process for foreign investors to form a corporate entity should become as quick and straightforward as it is for Chinese. Equal treatment in government procurement and standards-setting is also promised.

Redressing the issues around intellectual property will likely prove a different matter.

On the face of it, the new law and its implementing regulation published on December 31, appears to take steps in the right direction as it:

  • explicitly bans forced technology transfers, i.e., expropriation;
  • heralds an intellectual property rights regime closer to international practices; and
  • imposes an obligation on local governments to standardise administrative actions on foreign investment and ensure local officials act lawfully — no more passing onto favoured local businesses information reported by foreign investors. At least in theory. This Bystander fears old habits will die hard, regardless of the tightening of central control.

Inconsistent interpretation of national law by local governments points to an eternal truth of Chinese laws. They are an overarching statement of intent but otherwise mostly a blank slate until the detailed rules and regulations are published and then implemented, frequently on an as-needed basis. We have little to guide us until then.

China has improved its intellectual property protections in line with its companies having more intellectual property of their own to protect and has signed onto most relevant multilateral treaties, but the need and desire to advantage domestic companies remain.

The new law provides at least a couple of loopholes to allow this.

First, the ‘negative list’ that sets out the industries in which foreign investment is proscribed or restricted remains. Beyond that is a web of licensing requirements that hamper foreign investment in critical areas.

Second, the exceptions to the explicit ban on expropriation of foreign investments are broad and vaguely defined: ‘special circumstances’ and ‘in the public interest’. Foreign investment will also remain subject to ‘national security’ reviews.

The greatest unknown for foreign investors will be the effectiveness of the process for seeking and enforcing redress. There are many cracks through which to fall. The new Foreign Investment Law becomes one of three co-existent spheres of intellectual property protections in China. The other two are those provided through bilateral investment treaties between China and other countries, and those that are provided by the World Trade Organization’s Trade-Related Aspects of Intellectual Property Rights (TRIPS), which mainly apply to patents.

There are indications if not confirmations that in the event of a dispute, whichever of the three spheres that provides the greatest intellectual property protections will take precedence. However, our learned friends advise, the runes offer no reading of whether foreign investors must exhaust the remedies provided by domestic law —and thus take their chances in China’s newish commercial courts — before turning to international law, or whether they can take a short cut to international arbitration.

The other question is how much meat the new law provides for the United States. Intellectual property protection and market-opening is the kernel of US firms’ trade beef with China, even though it is the politically sellable trade numbers that US President Donald Trump focuses on. Trump’s announcement that he will sign a ‘Phase One’ deal on January 15, suggests Beijing has provided a big-enough headline victory with its new law for Trump to claim as his own, regardless of the devilishness in the details.


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China’s New Foreign Investment Law Ready-Made For A Trade Deal

THE NEW INWARD foreign direct investment law, rushed forward and freshly rubber-stamped by the National People’s Congress, ticks all the boxes that Washington would want to see ticked.

But then it has been framed to do just that.

It overtly levels the playing field between foreign and Chinese companies in that it forbids forced technology transfer as a condition of foreign investment approval and makes it a criminal offence for officials to share foreign investors’ commercially sensitive information with Chinese firms (furnishing that information remains mandatory for local subsidiaries of international firms, however). Intellectual property protection is high on the list of US negotiators’ demands in the current round of US-China trade talks.

It also holds out an olive branch on another of their demands, greater market access, by adopting a ‘negative list’ system. Any sector not explicitly restricted will be open to foreign investors. However, there will still be 48 sectors that will remain off-limits, such as gene research, religious education and news media, or only conditionally accessible, such as oil and gas exploitation, nuclear power and airlines.

Regardless, both aspects can be packaged up to mutual advantage, a ‘win’ for the US side and a ‘concession’ by the Chinese one, though in truth they are neither.

When the new law comes into force on January 1, 2020, as with all Chinese legislation, it will provide a framework that will be open to interpretation and subject to enabling rules and regulations and the rigidity and frequency with which it is implemented.

Enforcement and redress via the courts is another matter. The judiciary is subordinate to the Party. Courts, particularly the new specialist business courts have due process, but also know their place. Every foreign firm investing and operating in China needs to appreciate that, and the difference between rule of law and rule by law. China has the latter.


Filed under China-U.S., Economy, Trade

Anbang Nationalisation Underlines China’s Financial Stability Priority

Logo of Anbang Insurance Group. Photo credit: Mighty Travels. Licenced under Creative Commons.

WU XIAOHUI, THE politically well-connected chairman of the giant insurance group Anbang (his wife is Deng Xiaoping’s grand-daughter), has been in detention by authorities since last June. Now he is to stand trial for economic crimes, code for fraud and embezzlement, and the company run by personnel from the China Insurance Regulatory Commission for a year or two, an extraordinary move. The state assuming control of a private-sector business, and particularly one of this size and prominence, is unusual.

Anbang has been on an aggressive international acquisitions drive, buying such foreign trophy investments as the Waldorf Astoria in New York and a string of other luxury US hotels. Chinese firms, with official encouragement, have ‘gone global’ in recent years, rapidly expanding their international mergers and acquisitions activity.

In 2016, China overtook Japan to become the world’s second-largest overseas investor. Non-financial outward direct investment that year exceeded $170 billion, a 44% increase from the previous year, according to the Ministry of Commerce. However, such activity entails tremendous financial risk from the leverage taken on, a risk exacerbated by Chinese firms’ lack of experience with the integration and management challenges that M&A brings, especial in deals that cross national and cultural borders.

Anbang appears to fall squarely in this camp. On some estimates (its finances are notoriously opaque), it has encumbered itself with debt to the point that it is fast approaching technical bankruptcy despite having more than $300 billion of assets.

That also makes it ‘too big to fail’. State administration will provide the funding to keep its core life and non-life insurance business operationally solvent. The insurance regulator says the company’s current operations remain stable but that its solvency is seriously endangered by its ‘illegal operations’ unspecified but which presumably include its investments in prestige prime US real estate.

Last August, authorities announced a list of sectors hat should be off-limits for Chinese firms as the foreign investment spree into things like European football clubs and Hollywood entertainment businesses was exacerbating debt concerns.

More broadly, in the drive for financial stability and to forestall any systemic financial shocks, President Xi Jinping has been asserting greater control over state enterprises and reining in sprawling private conglomerates, notably the ‘big four’ — Angbang plus Dalian Wanda, Fosun International and HNA Group — that have expanded rapidly via debt-fuelled foreign acquisitions.

That quartet that accounted for 20% of Chinese foreign acquisitions in 2016. Also, there has always been a nagging suspicion that, given the quartet’s political connections, some of this M&A acted as a conduit for senior officials to get their money out of the country.

All have been ‘urged’ to sell assets and pay down their debt while state banks were told to rein in their lending to them. In January, the chairman of the Banking Regulatory Commission, Guo Shuqing, warned that ‘massive, illegal financial groups’ posed a grave threat to financial reforms and the stability of the banking system and that China would address the issue ‘ in line with the law’.

Taking Anbang into state control may be the prelude to a series of moves against the layer of private conglomerates below the ‘big four’, a group of some 25-30 companies said to be in the regulators’ sights. Despite or perhaps because of his connections, Wu’s treatment, in particular, is intended to show that no tycoon is immune from being ‘deterred’ from risky borrowing and investment overseas, or from being reminded that private M&A strategies should be integrated with national investment priorities.


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Huawei Technologies: Beijing Gets Its Reciprocity In First?

We have been wondering what to say about Huawei Technologies’ decision not to follow last week’s recommendation by the U.S. Committee on Foreign Investment (CFIUS) that it sell patents acquired as part of last year’s acquisition of 3Leaf Systems, a U.S. software company that lets many computers combine as more than the sum of their parts. But now we have a conspiracy theory.

Huawei has instead chosen to throw itself on the mercy of an executive decision by the U.S. president, Barack Obama. This struck us as a hiding to nothing. It is highly unusual for a U.S. president to overrule any CFIUS recommendation. In this particular case, where domestic political pressure brought about a retrospective CFIUS national security review of the deal and there is no apparent argument to be made that the committee made a glaring error, the political cost would be so great that it is hard to imagine any quid pro quo that would make Obama willing to devote even a scintilla of his political capital to pay it, even if that quid pro quo came from Beijing.

By taking the decision it has, Huawei keeps clean its argument that it is a civilian telecoms company and not a front for China’s military, the accusation made against in the U.S. and which it denies. Yet by not doing the expected thing — quietly walking away form the deal in the face of an adverse CFIUS finding —  it is setting itself up for a public rebuff from Obama, assuming that he rules as we believe he will. To paraphrase  Oscar Wilde’s Lady Bracknell, to lose one U.S. deal on national security grounds, as Huawei has already done in 2008, may be regarded as a misfortune. To lose both looks like carelessness.

Yet it is equally difficult to believe that Huawei would put itself through all that without at least the tacit support of Beijing — which will have to do a bit of diplomatic huffing and puffing in the event of the deal being unwound. Obama has only 15 days to decide so the decision is likely briefly to unsettle Sino-American relations so soon after President Hu Jintao’s state visit to Washington last month sought to smooth them. But equally, Beijing, ever one for reciprocity, may be quite happy to have a rejected Chinese takeover deal for an American company in its back pocket along with some ruffled national amour-propre now that it is setting up a committee of its own to review foreign acquisitions on national security grounds.

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Where China Put Its Big Bucks In 2010: Down South America Way

South America dominates the list of the biggest overseas acquisitions by Chinese companies this year. The two biggest to date: Sinopec’s $7 billion purchase of 40% of the Brazil assets of the Spanish energy group, Repsol; and the $5.6 billion CNOOC is spending in two phases for 50% of Bridas Corp., the investment vehicle of the Argentine vertically integrated energy group, Bridas. Bridas Corp.’s primary asset is Pan-American Energy (PAE). The partners are buying out BP’s 60% stake in PAE as BP raises cash to put in a piggy bank for any obligations arising out of the Deepwater Horizon accident, turning what looked in March like an iffy investment by CNOOC into something much more promising by the end of November.

Sinopec has since also picked up the U.S. oil company Occidental’s production and development assets in Argentina for $2.5 billion, the fourth biggest overseas investment by a Chinese company this year. The third biggest was Sinochem’s $3.1 billion purchase of a 40% stake in Statoil’s Peregrino subsalt field off the Brazilian coast. Add in a couple of smaller deals in Venezuela and Chinese firms have secured this year stakes in six projects that will eventually be producing upwards of 570,000 barrels of oil a day.

China’s state oil companies have long had a toe-hold in the region, but this year represents a big step forward, including diversifying China’s energy dependence on Venezuela. These deals have not only secured future oil supplies, they are also piecing together a vertical supply chain that includes refining, trading and storage — and further downstream power generation and distribution. State Grid, the world’s largest power utility and another state-owned behemoth, spent nearly $1 billion to acquire seven power distributors in Brazil as part of a deal it has won to be operate the power distribution system in densely populated southeastern Brazil.

Taken together those seven acquisitions would make a list of the ten largest overseas acquisitions by Chinese companies in 2010. As well as securing energy supplies for China’s own fast growing economy, Chinese companies will be well positioned to profit from the domestic growth of the emerging economies of South America.

In comparison the other big overseas acquisitions of the year seem small beer. PetroChina spent $1.6 billion to acquire Arrow, an Australian coal seam and power distribution company, in a joint bid with Royal Dutch Shell valued at $3.2 billion overall. Chinalco spent $1.3 billion to buy 45% of Rio Tinto’s Simandou iron ore business in Guinea through its Chalco subsidiary. China Huaneng Group, the country’s largest electricity producer, paid $1.2 billion for GMR Infrastructure’s 50% stake in InterGen, a U.S.-based utility that runs power plants in Britain, the Netherlands, Mexico, Australia and the Philippines.

The biggest industrial foreign acquisition was Geely’s $1.8 billion acquisition of Volvo from Ford Motor, the largest piece of business done by a company not state owned. The next largest industrial acquisition was the purchase of Nexteer, a parts-maker bought from GM by Pacific Century Motors, a joint venture between Tempo Group and the investment arm of the Beijing municipal government, a deal valued at less than $500 million.

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SAIC Stake In GM To Test Acceptability Of Chinese Investment In U.S.

What’s good for General Motors is good for, well, China these days, to mangle once more the oft-mangled quote of the company’s long-ago CEO, ‘Engine Charlie’ Wilson. The U.S. government bailed-out automaker is reported by the Wall Street Journal to be in discussion to sell 4% of the company to sovereign wealth funds and other foreign buyers as part of  next week’s initial public offering that will reduce the American public’s stake in GM to 35% from 61%. Among the latter group of prospective investors is Shanghai Automotive (SAIC), which is said to be in talks to take a 1% stake for around $500 million, though it could end up putting up to $1 billion into GM if that would get it better access to the U.S. car market.

Not, of course, that this would be the first Chinese investment in a well-known U.S. company, plus the stake is small, SAIC and GM are joint-venture partners and GM is the top-selling non-Chinese brand in China’s fast growing auto market. There is some industrial logic in the pairing when it comes to global sourcing and marketing, and for both companies perhaps some longer-term positioning benefits ahead of whenever the next round of global consolidation occurs in the auto industry.

Yet it would be a highly symbolic investment and comes when Sino-American relations over trade and investment are tetchy.  GM’s recent sale of a parts subsidiary in Michigan to Pacific Century Motors, a firm owned by the investment arm of the city of Beijing, passed relatively unremarked in the U.S. SAIC’s investment, should it happen, would not, especially in a political atmosphere where the Obama administration’s critics, newly encouraged by midterm elections success, try to make anything the administration touches politically toxic, and the GM bail-out already pushes plenty of  big-government hot buttons as it is.

This Bystander will be watching for the reaction if there is a backlash in the U.S. Ever since China National Offshore Oil (CNOOC) ran into a wall of American xenophobia that stopped dead in its tracks a bid for the U.S. oil company Unocal in 2005, Chinese firms have trodden gingerly when it comes to investing in any assets that have an American flag anywhere close by. We expect more self-assured steps this time.

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Chinalco’s Rio Deal On Verge Of Collapse

Some Rio Tinto shareholders have long questioned the economic logic of the company taking a $19.5 billion investment from Chinalco, saying existing investors could raise the money through a rights issue. Now it appears they have the upper hand. Reports from London say that the Rio board is expected shortly to announce that it has withdrawn its support for the deal.

That might spare the generally pro-Beijing Australian government a potentially awkward decision on whether to veto the deal on national interest grounds (the Foreign Investment Review Board was due to rule on June 15th), and strike at least one item from the list of hot button issues with Beijing right now that spans maritime rights to Gitmo Uighurs.

A rising  share price and easing debt markets have made a rights issue more feasible for Rio, which now plans to raise $15 billion that way to pay off debt, rather than take Chinalco’s convertible bond. But the state-owned aluminum giant is going to want a break-up fee for being jilted; $195 million is the number being bandied about.

The collapse of what would have been the largest Chinese foreign investment also reopens the door for Rio to some sort of tie up with BHP Billiton. Chinalco’s options look more limited.


Filed under China-Australia, Markets

China’s Automakers Likely To Cross Taiwan Strait For Parts

Taiwan’s three largest auto parts makers, Tong Yang Industry, TYC Brother Industrial and Depo Auto Parts Industrial, are open to investment from the mainland, Bloomberg reports. China’s car makers would get core design and manufacturing technologies they lack as assemblers and Taiwan’s parts makers would get access to on of the world’s still growing car markets. SAIC and Geely, who have acquired auto technologies in the U.K. and South Korea and Australia respectively, would be the most likely be in the vanguard of investors. Beijing lifted its ban on Taiwan investment on April 29 (see: “First Cross-Strait M&A Deals Struck“); for its part Taipei is considering opening 65 industries to mainland investment.

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China Deters Foreigners From Selling Bank Stakes

Bloomberg is reporting that Bank of America’s plan to sell $2.8 billion of shares in China Construction Bank that was pulled at the last minute on Dec. 15 was done so because of a securities law provision that would have required it to forfeit the profits on the sale.

China’s securities law bans investors holding more than 5% of a locally incorporated, publicly traded company from selling shares within six months of buying the stock. Not that such a law is on the statutes by happenstance, of course.

Bank of America first invested in China Construction in 2005, taking a $3 billion pre-IPO stake. It put in another $1.9 billion last June, and a further $7 billion in November, by exercising an option that was part of its first deal in 2005. That took BofA’s stake to 19.3% and gave it an estimated paper profit of $15 billion.

BofA needs to raise cash to recapitalize its balance sheet. But China doesn’t want strategic stakes in its banks traded like baseball cards, and it may have an eye on the end of the lock-ups next year for foreign investors in Bank of China and Industrial & Commercial Bank of China. Hence the law, which applies to shares of China-incorporated firms traded in Hong Kong as well as on the mainland exchanges.

Nor is it afraid to use it. Martin Currie Investment Management, a Scottish money manager, had its local bank deposits frozen by a Chinese court in June after selling part of its 5.9% stake in Nanning Sugar Manufacturing just five months after acquiring it.

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Faced With Losses, Beijing Stops Banks Buying Abroad

The FT’s Jamil Anderlini and Sundeep Tucker look at the reasons that China Development Bank didn’t get permission to bid $10 billion for Dresdner Bank, the German bank insurance giant Alliance has just sold to Commerzbank, and sees a trend.

“…after a string of high-profile overseas acquisitions last year that seemed to herald the arrival of Chinese financial institutions on the world stage, Beijing has turned cautious and has yet to approve any big offshore investment by the sector this year…,” Anderlini and Tucker say.

Doubtless the usual bureaucratic wrangling is to blame in part but there is another reason, as the FT’s chart shows (snapshot below): the six big investments made last year in overseas financial institutions at a collective cost of $18.9 billion have made a paper loss of $6.1 billion since.


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