Consider just the last half year: though a consortium led by Citigroup won a bid to take an 85 percent stake in a midsize Chinese bank, regulators refused to let Citigroup hold more than 20 percent, leaving the bank in local hands. Though top officials had welcomed private equity as a force for reform in China, regulators later cut back the size of the stake the Carlyle Group was allowed to take in a machinery company. In September the state-run Xinhua News Agency demanded that financial-news services such as Bloomberg and Reuters sell information only through Xinhua. Google agreed to filter results in its Chinese Version 3. And in July, Wal-Mart, once hailed as a positive force in Chinese retail, succumbed to pressure to allow the Communist All-China Federation of Trade Unions into its stores. That effectively inserts the Communist Party between the giant retailer and its employees.
Many experts say the backlash against foreign investment is temporary–part of a move to curb corruption and abuses in the market, and to level the playing field for domestic businesses. Others claim it represents a new era. They argue that China has now largely completed the phased opening of its markets, which it promised to complete in return for admission to the World Trade Organization. Now, there’s no reason to liberalize further, they say. Either way, the pressure on foreign companies is growing. “I think it is fair to say that over the last year or so, we have seen a tightening by the Chinese government on certain aspects of foreign investment,” says Hank Levine, former U.S. deputy assistant secretary of Commerce for Asia, and now a senior vice president at Stonebridge International, a consulting firm based in Washington, D. C. “There are a number of Chinese academics and some government officials who are pushing back against the policy of reform and opening up.”
China’s leaders were once willing to bend the rules to attract top multinationals, but no more. Last year, the Chinese Food and Drug Administration seemed on the verge of handing a huge victory to foreign manufacturers of medical devices, a group that includes household names like GE, Phillips and Siemens. After a decadelong ban, the Chinese announced plans to allow foreign companies to sell refurbished (rather than only brand-new) medical equipment, as most countries already do. The ban had limited Western sales to the few rich hospitals that could afford new machines. Opening to refurbished equipment, which is 20 to 50 percent less expensive, promised to boost Western sales dramatically. The Chinese medical-device market, growing at 20 percent a year since 2000, had suddenly become much more attractive.
Then things got ugly. Chinese medical-equip-ment makers went into attack mode. In newspaper articles, Chinese executives called the refurbished equipment “foreign garb-age,” and conjured up images of dirty scalpels and defective machines. At a meeting of the Chinese FDA last April, some local executives chastised the government body for allowing foreign firms to attend. The meetings became so heated that arguments broke out in the hallways between foreign and Chinese executives.
Under pressure, the Chinese FDA tabled the regulation, saying it needed more time for study–a handy excuse to appease locals, says one industry insider, who supplies parts to both foreign and domestic manufacturers. “The local manufacturers saw this as a conflict with their interests, and they thought they could at least slow down the process,” says the insider, who asked not to be named because the issue is so sensitive. “I think the market will open up, but the concern from foreign invested companies is when?”
For now, the forces within China that question foreign investment are gaining ground. Some argue that China’s economic growth came at too great a cost–to both local industry and the man on the street–and they have the ear of Hu and Wen, who promise a more “harmonious” society. Those people, many of them scholars, argue that China hasn’t gained much from showering foreigners with incentives. Even demands for proprietary foreign technology, which often rankle Western companies, have not brought much benefit to China, they argue. After 25 years of demanding proprietary technology from foreign automakers and the like, China has created no internationally recognizable brand names of its own.
The same voices accuse foreign companies of operating with lower moral standards in China than they do at home, worsening the corruption problem. With local rebellions against corruption and social inequity breaking out across China, leaders are now paying more attention to the downside of market reform. “The policy of opening up is still the main policy in China,” says Mao Shoulong, a professor at People’s University in Beijing. But, he added, “if someone questions a reform and he or she is an important person and not easy to control, the central government might just suspend that policy.”
Indeed, local industry leaders have taken advantage of new doubts about the value of foreign investment. They are effectively lobbying government officials and using the media to whip up nationalist sentiment. They like to argue, for example, that unchecked foreign investment threatens the country’s competitiveness and could prevent China from growing out of its role as the world’s factory and into a leading innovator. Take, for example, what happened when the Carlyle Group made a move to buy the Xugong group, a state-owned machinery company. After Carlyle’s offer, the China Machinery Industry Federation itself worked closely with the government on drafting a policy requiring approval for takeovers in key industries.
The chief executive of Carlyle’s main competitor in the bid, Xiang Wenbo of Sany, launched an extensive attack on his blog, warning the government not to sell out the country to foreigners. The Carlyle Group won its bid for Xugong earlier this month. But rather than an 85 percent acquisition for $375 million, the deal was reduced to a 50 percent joint venture for about $225 million. “There is lots of talk about foreign investors coming in and investing and letting these Chinese brands die, and now that underlying concern has dovetailed with mergers and acquisitions by foreigners,” says Graham Matthews, a partner with PricewaterhouseCoopers’s Transaction Services group in Shanghai. “There’s a lot of concern about what’s going to happen to these national champions.”
Some China watchers dismiss fears that Beijing is turning on foreign investors. They argue that the Chinese government is simply evolving, setting up regulations similar to those that developed countries have had in place for a hundred or more years. The process is bound to be messy, and driven by interest groups at times, they argue, as it is elsewhere.
They quickly point to last year’s failed attempt by the Chinese oil company Cnooc to buy the American company Unocal, a deal that fell through largely due to anti-foreign sentiment in the States. And they argue that for the most part, Beijing has legitimate policy concerns driving the regulations. “It will take some time to build a body of experience on which to rely so that people get a sense of what is permitted and what isn’t,” says Maurice Hoo, a partner at the Paul Hastings law firm in Hong Kong. But, he added, “try to find another government that has run its economy as successfully as the Chinese government in the last 25 years. They didn’t do that by just being arbitrary.” And, of course, most foreign companies are willing to take a chance on the next 25 years.
