elays in a number of high-profile buyout deals over the past year or two have raised the specter of a newly protective government intent on keeping domestic enterprises out of foreign hands.
The complaint is valid but simplistic. Today, more foreign investors than ever are buying a slice of China, and that is inevitably creating tensions.
Since China's opening, US$622.4 billion has found its way into the country from overseas. All this time, the buyout market remained silent. In 2003, China accounted for 9.6% of global FDI flows, but cross-border mergers and acquisitions (M&A) made up just 1.3% of the global total.
The reason was simple. Prior to 2003, the country had little to sell beyond cheap labor, and those large Chinese companies that did exist were neither on the auction block nor in demand.
Half of this picture is changing fast, with everyone wanting to buy into the world's fastest growing market. Thomson Financial recorded US$13.2 billion in completed acquisitions by foreign companies in 2005, up from only US$2.7 billion in 2001. M&A accounted for 3.9% of FDI in China in 2002; in 2005 its share was 21.5%. In the first 11 months of 2006, US$39.9 billion in merger and acquisitions funds found its way into China, targeting some 1,700 domestic companies.
The problem for these investors is that while China once needed help to build its economy, today it has the beginnings of a modern economy and wants to complete the job alone.
Unnecessary red tape
In September, the government said that overseas buyers of Chinese assets would need official clearance for deals that involve key industries, well-known trademarks or "old Chinese brands."
In part, it's a recipe for disaster. China's companies need all the help and capital they can get. The regulators know this and they are happy to accommodate foreign investors under the right conditions, and on the right terms.
Ask Goldman Sachs, which effectively operates a domestic brokerage right under the securities regulator's nose despite an effective ban on foreign involvement in the sector. Meanwhile, Home Depot, the world's largest home-improvement retailer, encountered few barriers last month in buying HomeWay, the Tianjin-based owner of 12 home improvement stores.
What sets the successful deals apart is that the investors are realistic in their goals, and bring more to the table than they take. China has become more attractive, and in turn the government has become more wary.
It may not be fair, but there is little point taking the giant on. There is more to be gained from making friends with the government than foes. The winners will be those like Goldman that seek to add value where it's needed, not just take value wherever they can.
