China's uneasy Wall Street welcome
BEIJING (AP) - February 21, 2008 The latest casualty: A deal by a Chinese maker of telecom gear
and an American private equity firm to buy U.S. tech company 3Com.
The bidders say they just want to make money. But acquisitions
are a political minefield because many Chinese buyers are owned by
or close to the communist government, feeding fears that Beijing
might gain access to military technology or control of strategic
resources.
"Where it looks purely commercial, everyone finds that
acceptable, but where it touches on resources or security concerns,
it just falls into a different basket," said William Hess, China
analyst for the consulting firm Global Insight. "As soon as
politics enters into the equation, it raises the risks for all
parties. It's not just a business case."
The arrest this month of a Pentagon employee charged with
selling military secrets to a man accused of being a Chinese spy
"certainly doesn't help the political climate in Washington," he
said.
On Wednesday, Huawei Technologies Co. and its American partner,
Bain Capital, withdrew a request for U.S. government approval of
their $2.2 billion bid to buy 3Com. The companies said they failed
to satisfy national security concerns.
American lawmakers and officials had expressed concern that
sensitive technology could be transferred to China through Huawei's
16.5 percent 3Com stake. A person familiar with the matter told The
Associated Press that Bain offered to sell its Tipping Point
subsidiary, which makes network-security software.
China's government said Thursday the Huawei bid was commercial
and appealed to Washington to handle it fairly.
"We hope the relevant U.S. authorities can deal with the case
in accordance with law so as to create a fair and favorable
environment for Chinese enterprises in the United States," said
Foreign Ministry spokesman Liu Jianchao.
American opposition to such purchases is prompted by unease
about China as a strategic rival, rather than details of individual
deals, said Joseph Cheng, chairman of the Contemporary China
Research Center at the City University of Hong Kong.
"There is this perception that China is the most serious threat
that the United States will face in coming decades, and this
perception has colored the opposition to these mergers and
acquisitions," he said.
Unease about China's acquisitions extends to Europe, Australia
and elsewhere.
It has been fueled by questions about how China's $200 billion
sovereign wealth fund, launched last year, will invest and whether
its financial muscle will be used to push official policy.
European Union Economy Commissioner Joaquin Almunia said in
September the EU might restrict investments by such funds if they
fail to disclose more about what they invest in and why.
On Sunday, Australia issued new foreign investment rules, saying
it would look more favorably on proposals by state-controlled
entities that operate on a transparent and commercial basis.
Such investors might "pursue broader political or strategic
objectives that could be contrary to Australia's national
interest," the guidelines said.
China burst onto the acquisitions scene when computer maker
Lenovo Group agreed in December 2004 to buy IBM Corp.'s personal
computer unit in a $1.75 billion deal. Some critics cited possible
security risks, but the sale went through after U.S. regulators
apparently decided PCs were too generic to pose a threat.
The following year, state-owned oil company CNOOC Ltd. ran into
a firestorm when it tried to buy Unocal Corp. CNOOC dropped its bid
for the U.S. oil and gas producer after opponents said it might
endanger energy security.
Since then, China has refined its strategy, trying to shield
itself from criticism by forging partnerships with U.S. and other
companies to make sensitive investments.
Last year, state-owned China Development Bank invested in
Barclays PLC and committed financing to the British bank's takeover
bid, ultimately unsuccessful, for Dutch rival ABN Amro.
In January, state-owned Aluminum Corp. of China teamed up with
U.S.-based Alcoa Inc. to buy 12 percent of Rio Tinto PLC,
complicating a bid for the mining giant by Australia's BHP Billiton
Ltd.
Huawei, the 3Com bidder, exemplifies the ambiguous status of
Chinese companies.
The company says it is private, but its founder and chairman is
a former soldier and early customers included China's military and
state-run phone companies. Huawei adds to the mystery by declining
requests for interviews and information.
"Even when Huawei and other companies say they're not connected
to the government, no one really believes them, in Huawei's case
with good reason, because it has deep ties to the military," Hess
said.
China's purchases of overseas assets have soared over the past
two years as Beijing encouraged companies to go abroad in hopes of
reducing reliance on export-driven manufacturing.
Chinese acquisitions in the United States rose to $226.6 million
last year, more than 16 times the 2006 level of $13 million,
according to research company Dealogic PLC. So far this year,
another $162.7 million in deals have been announced.
Most passed without comment, such as Wuxi Pharma Tech Inc.'s
$163 million purchase of AppTec Laboratory Services Inc., a
supplier of medical tests in St. Paul, Minnesota.
In December, Wall Street welcomed a $5 billion investment by
China's sovereign wealth fund in Morgan Stanley that helped
replenish the bank's assets after heavy losses in risky mortgages.
In Europe, Chinese acquisitions last year totaled $563.2
million, according to Dealogic.
European and U.S. state governments states eagerly try to woo
Chinese money. Last year, Alabama Gov. Bob Riley brought a
50-member delegation of businesspeople to China to meet potential
investors.
Despite such lobbying, China's elite will take the failure of a
3Com bid as proof the United States wants to slow their country's
economic and technological rise, Cheng said.
"It will certainly reinforce the image that the United States
doesn't want to see a strong China," he said.