Red tape stymies ODI

For private Chinese firms, investing abroad is supposed to be easy. They aren’t playing with the citizens’ money, and their management (theoretically) is supposed to be more market-oriented. On the other hand, Beijing has a political interest in making sure Chinese firms don’t embarass themselves abroad, and would also prefer that if anyone is going to get credit for becoming China’s first world-beater international firm, it be state-owned, state-controlled or at least heavily state-invested (see Huawei, Lenovo). For a private firm to succeed where SOEs have failed would call into question the Party’s role in steering business development.

There is also the issue of face. For a private firm to fail is okay as long as it is low profile, but buying Hummer just to bury it would be embarassing for everyone. Ditto, perhaps, for Xiking Group’s bizarre acquisition of British Propeller TV channel; Xiking, which has no experience with media, much less running television stations, plans to run bilingual programs in England "promoting greater understanding of China and Wenzhou" in particular. LinkGlobal Logistics acquired Parchim Airport in Germany for US$130 million in 2007, but according to industry sources has not done very well. English language materials on the airport’s website are now written by Chinese speakers: "Invest in the Bonded Business Park Can Enjoy Preferable Policy!" Just because these firms are private does not give them experience abroad. So when a Sichuanese company with no experiencing manufacturing cars says it’s going to start making Humvees, one might expect eyebrows to be raised.

So there’s a debate, and it was recently highlighted by today’s unprecendently public spat between the National Reform and Development Commission (NDRC) and the Ministry of Commerce (MofCom) over whether or not to allow Sichuan Tengzhong to take Hummer off GMs hands. MofCom is pro, NDRC against, but one might ask, why are there two agencies charged with approving the same application?

Actually there are three, and in the case of SOEs, four. In addition to MofCom and NDRC, Sichuan Tengzhong also needs State Administration of Foreign Exchange (SAFE) permission to access the necessary forex, which is supposed to be a formality. SOEs also need clearance from the State-owned Assets Supervision and Administration Commission (SASAC). But MofCom and NDRC are the most important as their responsibilities and criteria for approval are both vague and occasionally overlapping, and because they oversee both public and private investments.

This situation cannot endure. While giant SOEs have better access to credit and influence over the approval system, these advantages are both policy distortions. Indeed, political scientist Elizabeth Economy has suggested that in some cases, China’s mammoth petroleum SOEs have steamrolled over objections from the regulatory bureaucracy. For example, CNOOC’s clumsily attempted acquisition of Unocal was resisted in Beijing, she said. Private investors, on the other hand, are in the reverse situation. Henan-based LinkGlobal Logistics’ 2007 acquisition of Parchim Airport in Germany was temporarily stymied by MofCom for paperwork problems.