Why America sees red in corporate China
Li Axl-ftjn748
By David Pilling
Published: August 4 2010 22:12 | Last updated: August 4 2010 22:12
Huawei, one of the world’s top telecommunications equipment manufacturers, likes to portray itself as an innovative, privately held business owned by its 20,000 employees. But all that most American officials see when they look at the fast-growing Shenzhen-based company is the red of the Chinese flag. Once again, Huawei has failed to crack the US market. Last month, its attempts to buy two US companies were thwarted when one bid for 2wire, an internet software group, and another for a unit of Motorola were rejected. Though Huawei had offered the highest price in both instances, fears that US regulators would block the acquisitions on security grounds short-circuited the process. The companies were sold instead to Pace of the UK and Nokia of Finland.
It is not the first time Huawei’s American parade has been washed out. In 2008, it dropped its bid for computer-equipment maker 3Com because of Washington’s concerns it could gain access to military-related anti-hacking technology. Huawei’s provenance hardly helps. Founded by Ren Zhengfei, a former officer in the People’s Liberation Army, it has failed to shake off suspicions that it is a front for the Chinese military, something it vigorously denies.
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The recent rebuffs have provoked anger in Beijing. An opinion piece in the Global Times, a tabloid, accused westerners of being prejudiced against Chinese companies and seeing the hand of the state in every transaction. “Despite intensified globalisation, the invisible wall of the cold war era still looms between the west and the east,” it said.
As the article suggested, Huawei, though an extreme example, illustrates a much wider point. Just as in the 1980s, when Japanese companies were routinely accused of carrying out some dastardly, state-orchestrated plot, Chinese companies are now widely viewed as pursuing a China Inc agenda. In 2005, an $18.5bn bid by state-owned CNOOC for Unocal, a US oil and gas group, fell foul of US misgivings that Beijing was using state muscle to grab global assets. Similarly, an attempt last year by Chinalco, China’s state-owned metals group, to invest $19.5bn in Rio Tinto provoked a political backlash in Australia. The deal was dropped.
Not all Chinese acquisitions are derailed. Lenovo was allowed by US authorities to buy the loss-making PC unit of IBM. But all such deals must be vetted by the US Committee on Foreign Investment (Cfius). This June, a joint venture between a US fibre-optics maker and a Chinese investment corporation never even made it to Cfius because of security objections from the White House.
US officials are not coy about their unease. In a speech last week, Jon Huntsman, US ambassador to Beijing, conceded that Americans tended to be suspicious of state-owned companies. Clyde Prestowitz, a US trade official in the Reagan administration, argues that the US is not vigilant enough in combating Beijing’s mercantilist policies. “It’s not the same animal playing the same game,” he says, referring to what he regards as China’s bureaucratic-led industrial policy, replete with state incentives, state lending, state-led consolidation and state-orchestrated forays abroad.
In the view of Mr Prestowitz, who recently wrote The Betrayal of American Posterity, a book about the country’s loss of competitiveness, the US is repeating the mistake that Britain made at the end of the 19th century. Then, he says, the UK put too much faith in the workings of the free market, throwing away its advantage to mercantilist nations such as US and Germany. Japan and other south-east Asian nations such as Taiwan, got away with similar industrial policies in the context of the cold war. Now China is at it, but on a far larger scale, he says. “I’m not saying the Chinese are wrong to be doing what they are doing. I’m just saying that the US should not be as dumb as the Brits.”
Orville Schell, a China expert at the Asia Society, has a different take. He worries that the US is in danger of being overly wary of Chinese investments. As a result, he fears, it could miss out on the huge amounts of capital now flowing out of China. He points to a recent case in which 50 US lawmakers objected to plans by China’s Anshan Steel to invest $175m in America’s (hardly booming) steel industry. “The river of capital is flowing backwards,” he says of China’s huge foreign exchange reserves and its need to invest in real assets. “I understand national security concerns, but we shouldn’t cut ourselves off from these capital flows.”
This is the dilemma now facing the US. It must decide whether Chinese companies are making commercial decisions or whether they are part of some grand plan fashioned at Communist party HQ. If it suspects the latter, as it has at least occasional cause to, it must determine whether accepting such investments poses either a strategic or a security threat. And when the US does detect such a threat, it will have to be prepared to sit serenely on the sidelines as a wall of Chinese money goes elsewhere.