2016 is turning out to be a rather profitable year for the monolith that China’s state-owned enterprises (SOEs) have become. In this year’s first trimester alone, the combined value of Chinese outbound mergers and acquisitions (M&A) had already rocketed to roughly $68 billion, more than the total value of deals signed in 2015.
In the US, China pushed through deals worth more than $33 billion until May this year, a massive surge compared to last year’s rather fickle $2.9 billion of deals finalized in the same period. However, distrust towards Chinese SOEs is growing fast, as national security concerns render some of the proposed outbound deals involving Chinese firms under increased scrutiny. The largest such deal, between ChemChina and Swiss agricultural company Syngenta, is currently being investigated by the Committee on Foreign Investment in the United States (CFIUS) and by the US Department of Agriculture (USDA). Given the mounting problems that SOEs are facing abroad, it is high time China opened up its economy to foreign investment as well.
What’s more, a recent groundbreaking EU ruling has increased the pressure on Chinese SOE business ventures abroad. Analyzing a joint venture’s consequences in relation to other Chinese SOEs operating in the nuclear sector in other markets, the ruling introduced an expanded review process that focuses on all the assets managed by China’s Central SASAC [State-owned Assets Supervision and Administration Commission of the State Council] active in a given industry. As Reuters reported, the decision effectively adds an extra barrier that could either scuttle of delay future Chinese SOE mergers, which will now be forced to go through a lengthy approval process in Europe.
Moving in the right direction?
Although the high-level eighth Strategic and Economic Dialogue between the US and China yielded only few results, such as China agreeing to extend a rather symbolic RMB 250 billion Qualified Foreign Institutional Investor quota to the US, officials from both countries emphasized their desire for concluding the Bilateral Investment Treaty (BIT), which had been stalled for years, raising hopes China is officially ready to allow more foreign investment to flow in.
Indeed, the biggest stepping-stone in concluding the BIT between the two countries so far has been China’s lack of reciprocity, namely its barring of foreign investors from entering a number of protected economic sectors. Hence, bringing China to downsize the “negative list” of off-limits sectors is pivotal in reaching an agreement – which is precisely what Beijing promised would do on June 6.
While signs seem positive in that regard, the economic benefits that China could reap from a BIT could be rendered void by China’s systemic internal shortfalls unless the Chinese leadership decides to embark on economic reforms in earnest. Without more reform, concerns that the People’s Republic under Xi Jinping’s aegis will go down a dark path, characterized by the continuous sheltering of the dysfunctional state enterprise sector, a sector that lives under CCP’s wing, will only grow.
As David Dollar of the Brookings Institution pointed out, SOEs tend to dominate sectors such as finance, telecommunications, transportation, and media. Ever since China began to readjust its growth model, “these service sectors are now the fast-growing part of the economy, while industry is in relative decline.” However, if China hopes to maintain good economic growth rates in the years to come and stave off potential civic unrest, access to international funding, investment and competition is crucial.
The net outcome of bringing BIT negotiations to a fruitful conclusion would signal a greater amount of trust between the world’s two largest economies. And considering their ongoing geopolitical competition around the South China Sea, that may go beyond the economic realm. Indeed, a BIT would alleviate a variety of issues for both countries.
First, it could be a sensitive way of compelling China to commit to its own goals of opening up these sectors to competition and private international investment. Second, according to the US-China Business Council (USCBC), a “high-quality US-China BIT would give American companies better access to China’s market, and equal rights as Chinese firms, [and] provide American companies with a better opportunity to expand in China.” Third, a BIT could help alleviate Chinese concerns over the activities of the CFIUS. China has a long history of complaining about the CFIUS blocking its investments into the US, but a BIT could lead to greater transparency in the review process and clarification of review criteria for both private firms and SOEs.
Unless China starts showing sincere goodwill to foreign investors by allowing reciprocity in market access, mistrust towards the intentions of Chinese SOEs can only rise. Defensive measures against SOEs will become more stringent as well, leading to the possibility that Syngenta’s trials in the US and, even more dramatically, in the EU, could become the norm. The writing’s on the wall: reciprocity can no longer be postponed by Beijing without hurting its own interests.
Robert Held is a financial consultant currently living in Geneva, Switzerland.
The opinions expressed in this column are the author’s own and do not necessarily reflect the view of Asia Times.
Copyright Robert Held