Note that almost all US companies doing business in China agree to 'technology transfer' in order to be allowed to do business there. That means that they are giving away technology secrets ...
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China to Step Up Scrutiny of Buyouts
HONG KONG, Aug. 27 — As the Chinese government and many Chinese companies start looking for foreign companies to buy, including a possible bid for a United States manufacturer of computer hard drives, lawmakers in Beijing are about to pass legislation limiting foreign acquisitions in China on national security grounds.
After 13 years of debate and various drafts, the National People’s Congress is poised to pass a broad anti-monopoly law this week. But while Western companies have welcomed many of the law’s provisions, including limits on monopolistic behavior by state-owned enterprises, the final draft also has a last-minute addition: acquisitions by foreign companies “should go through national security checks.”
The addition is part of what many executives and lawyers describe as a greater Chinese skepticism of foreign investment, even as the Chinese government is setting up a $200 billion overseas investment fund and encouraging Chinese companies to buy foreign businesses with valuable technology or brands.
“There is certainly a desire by the Chinese government to ensure the crown jewels are not pillaged away by foreign invaders coming in,” said Connie Carnabuci, a partner in the Hong Kong office of Freshfields Bruckhaus Deringer, a global law firm.
With $1.3 trillion in foreign-exchange reserves and a swelling trade surplus, Beijing officials face a constant struggle to manage the money streaming in and to prevent it from driving up the value of the yuan. National security concerns have been raised more often lately as a reason to delay deals in industries that would not be seen as security risks in the United States.
The Carlyle Group, the American private equity company, has been trying for nearly three years to buy a construction equipment manufacturer, with government approval still on hold as some Chinese officials have mentioned national security worries; even a French purchase of a Chinese cookware company was delayed this year for a national security review, although the Commerce Ministry eventually gave its approval.
“Where China used to require foreign capital, and while China used to require foreign managers, now they’re comfortably pat with capital, and the managerial class has gotten better, so what do they need foreign investors for?” said John Kuzmik, a partner at Baker Botts, a Houston-based energy law firm.
Many experts say that Chinese officials have long made national security a key consideration in their reviews of foreign purchases and that the new legislation simply formalizes this. Various Chinese rules and regulations also require that national security be taken into account during government reviews of mergers and acquisitions.
“This just provides a legal footing for objections,” said John Zhang, a partner at the international law firm Greenberg Traurig. “In the old days, they probably wouldn’t tell you why they were objecting to a foreign investment.”
The language in the new legislation is evocative of politicians’ complaints in the United States two years ago when the state-owned China National Offshore Oil Corporation tried to buy Unocal, only to retreat in the face of strong opposition from Congress. Chinese officials have repeatedly cited that example in recent months in calling for tougher rules in China.
“Until Unocal, I’m convinced the Chinese really, really believed the United States rhetoric of freer markets and open international borders,” Mr. Kuzmik said. “They were shocked, I believe, at the politicians.”
William Watkins, the chief executive of Seagate Technology, said in an interview Thursday that a Chinese technology company had expressed interest in acquiring a manufacturer of disk drives; there are only two, Seagate and Western Digital. The Chinese government and state-owned media were silent today about this possibility.
The new legislation has numerous provisions long sought by Western companies. While earlier drafts referred to protecting the rights of businesses, and could be cited by state-owned enterprises seeking to avoid being purchased by multinationals, the latest draft calls for protecting consumers.
Mergers and acquisitions accounted for only 5 percent of foreign direct investment in China before 2004, but this proportion rose to 11 percent in 2004 and almost 20 percent in 2005, the official newspaper China Daily said in its weekend issue. No figure was provided for last year.
The Chinese government has eased controls in some industries and now allows foreign companies to own 100 percent of factories in industries like auto parts, where joint ventures with Chinese businesses were previously required.
But in other industries, like car assembly, multinationals are still limited to 50 percent stakes.
“This law, I think, on the whole is consistent with international best practices — there are some things that are odd,” notably the national security clause, said Jonathan Palmer, managing partner of the Hong Kong office of Heller Ehrman, a global law firm.
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