Donald Trump’s surprise win in the US presidential election is adding fire to a simmering campaign in Congress to oppose all Chinese takeovers of US companies on national security grounds — regardless of whether the bids have direct implications that affect US security from a defense or strategic standpoint.
Analysts say growing numbers of US lawmakers appear ready to block Chinese acquisitions of American firms if such takeovers are viewed as boosting China’s economic competitiveness and “soft power” vs. the US.
The push in the last few months by a bipartisan group of US senators has targeted stateside acquisitions by Zhongwang International, a big Shenyang-based aluminum processor, and the Dalian Wanda property and entertainment conglomerate headed by Wang Jianlin.
The letter-writing campaign to US government agencies that review foreign acquisitions went little noticed amid the distractions of the presidential race. But it is being said that such mounting opposition to Chinese investment represents one of the most serious challenges to Sino-US economic ties in years.
“These Chinese acquisitions are no longer being allowed to stand on their own,” said Henry Tang, the managing partner of New York-based Carnegie Towers Group, a global strategic investment advisory. “Many members of Congress now want to vet all Chinese acquisitions in the US.”
“There’s already a bigger call in Congress to vet Chinese acquisitions because of the way large industry is integrated with the communist party in China and growing concerns about military applications and industrial competitiveness,” said Peter Morici, an economist and professor at the University of Maryland business school.
While the campaign to rein in Chinese takeovers predated Trump’s election, the GOP candidate’s triumph at the polls has been partly attributed to his militant stance against China on trade and currency issues.
Now that the White House and Congress are both in Republican hands, the path seems clear for more restrictive policies against Chinese investment in the US, though analysts say it’s too soon to know what Trump will do on the issue.
Morici notes that Germany and other western nations are also taking a harder line toward Chinese investment. “This is something that’s trending generally through the West,” said Morici, a former official at the US International Trade Commission. “Given that China’s become a much more sophisticated manufacturer and given the way it plays the game … we’re going to see more of a [crackdown on Chinese acquisitions here].”
If Morici is right, this could have a big impact on Chinese investment flows to the US. A China Daily analysis says that between 2000 and Q2 2015, Chinese firms signed a total of 1,117 investment deals in the US worth US$54 billion. On the plus side, these inflows aided job and capital creation and opened foreign markets for US industries.
For China “engagement” advocates the main worry is that Chinese mergers and acquisitions (M&As) in retail, consumer, auto, and other non-defense sectors, which previously got an easy pass, may now face unprecedented scrutiny.
China as unfair competitor
In Zhongwang’s case, 12 US senators, in an November 2 letter, urged the overseeing Committee on Foreign Investments in the United States (CFIUS) to review and “ultimately reject” a US$2.3 billion bid by Zhongwang to acquire US aluminum products maker Aleris Corp. They objected on the grounds that it “would damage the US manufacturing base for sensitive technologies in an industry already devastated by the effects of China’s market distorting policies.”
One of the signers was Senate Democratic Minority Leader Charles Schumer of New York.
In Dalian Wanda’s case, 16 members of Congress from both parties sent a letter to Gene L. Dodaro, the chief of the Government Accountability Office, calling into question the Chinese multinational’s purchase of Hollywood production company Legendary Entertainment for Us$3.5 billion.
They also questioned Dalian Wanda’s pending deals to buy Dick Clark Productions and Carmike Cinemas. “Should the definition of national security be broadened to address concerns about propaganda and control of the media and ‘soft power’ institutions?” the legislators asked in a September 15 letter.
Representative John Culbertson (R-Texas), a House subcommittee chairman, also sent a letter to the Justice Department on October 6 asking the agency to investigate whether Dalian Wanda’s recent takeovers of US entertainment firms could lead to “foreign propaganda influence over American media.”
The rationale for such Congressional ire is that China’s rising global economic and financial clout makes any Chinese takeover of American firms a potential threat to US security.
If the argument becomes policy, it will signal a marked departure from earlier practice where mostly Chinese acquisitions of defense-related US firms or those engaged in sensitive technologies with military applications were blocked by the US government.
Private Chinese firms targeted
Such anti-Chinese sentiment is seen as especially disturbing in some quarters because opponents don’t differentiate between acquisitions proposed by private Chinese companies vs. those proposed by state-owned enterprises or SOEs.
It assumes that private Chinese businesses, which aren’t under the Chinese government, will likely transfer intellectual property and other assets acquired through US M&As to Beijing, undermining American security and competitiveness.
At the same time, some US concerns about Chinese acquisitions seem justified at a time when the dividing line between military and civilian-use technologies is exceedingly thin.
Computer-aided manufacturing processes for non-military products, for example, can also churn out military hardware. Technology from acquired US companies could also be transferred from private companies to China’s government under duress.
Robert Lawrence Kuhn, a global strategist and advisor to China’s government says Chinese officials are “cautiously optimistic that consistency will be maintained” in Washington’s stance toward Chinese M&As despite Trump’s election. But he cautions it’s too soon to tell how Chinese companies will react to the latest M&A controversy.
The increasingly negative view of Chinese investment in the US has been building for years. CFIUS, in the last decade, has generally green lighted Chinese acquisitions if there were no direct military implications. The one exception has been energy.
In 2005, for example, CFIUS, gave the green light for Chinese computer maker Lenovo to purchase IBM’s personal computer division in a US$1.75 billion landmark deal.
But while PCs weren’t deemed a national security threat back then, this wasn’t the case in 2005 when China’s state oil company CNOOC made a bid to buy California Energy firm Unocal Corp.
CNOOC withdrew its US US$18.5 billion bid after US legislators objected to the deal, saying that giving China control of Unocal’s energy assets would threaten US national security and violate fair trade rules. This, despite the fact that the larger portion of Unocal’s energy holdings were in Southeast Asia and not the US.
The ill-fated CNOOC-Unocal deal was the first example of US “strategic” interests being used to scuttle a major Chinese acquisition.
US national security concerns also emerged in connection with the US$7.1 billion acquisition of Smithfield Ham by China’s Shuanghui in 2013. US officials let the deal through, but critics argued at the time that a Chinese company shouldn’t be allowed to take control of Smithfield because its meat products were consumed by the military, putting US personnel at risk.
Zhongwang’s bid to acquire US-base Aleris also indicates that the definition of “strategic threat” by US foes has shifted to include acquisitions that would increase China’s general industrial competitiveness vs. the US.
The deal’s opponents say a Chinese takeover would provide access to sensitive technologies that have both civilian and military uses. They also note that Zhongwan would gain US automakers as clients, in addition to getting business from Boeing and various US defense contractors.
Zhongwang reacted to the criticism by saying it is a private company with no ties to China’s government. It also emphasized that the deal would provide Aleris with a capital infusion and that the takeover wouldn’t result in layoffs or changes to the US company’s management or policies.
An Aleris spokesman told Reuters that less than 1% of the company’s sales have defense applications and that its US production focuses on making aluminum for vehicles, gutters and other civilian products.
Doug Tsuruoka is the Asia Times Editor-at-Large