Tuesday, 18 December 2012
An investment ‘bridge’ is built for China?
When Prime Minister Stephen Harper declared foreign governments would no longer be permitted to take over Canadian oil sands assets, it was portrayed at home as a tough new policy, made at the risk of offending the Chinese government. But Beijing, delighted by Mr. Harper’s approval of the $15.1-billion (U.S.) takeover of Calgary’s Nexen Inc. by China National Offshore Oil Corp., didn’t see the new rules as particularly tough or unexpected. The changes were more a predictable closing of a door that some Chinese policy makers were surprised ever existed. And a crack may remain open, since the new rules may allow for another takeover by a state-owned enterprise (or SOE) under “exceptional circumstances.”
Rather than create a barrier, those involved in crafting CNOOC’s takeover of Nexen say Mr. Harper has helped them build a “bridge” to the energy markets of the developed world. His moves permit the purchase to proceed and help draw up a playbook for how similar Chinese investments could be treated by other Western countries, where – as in Canada – there are lingering suspicions about the intentions of companies controlled by China’s Communist Party government.
“Harper, the Prime Minister, actually made a wise balance with the deal … We now see Canada as a bridge, the best place for China to get involved in the developed world,” said Xu Xiaojie, who advised both CNOOC and the Chinese cabinet on the Nexen deal and travelled to Calgary twice during the negotiations. He said he had expected the CNOOC-Nexen deal would take a long time to be approved, and that additional conditions would be added.
“Canada has provided an example of how China can work with a very developed legal and social system, an example for China of how we can make ourselves internationalized,” said Mr. Xu, who is the chair of the World Energy Research Project at the Chinese Academy of Social Sciences, a government-run think tank. “I believe such a model could be emulated in other countries – maybe Australia immediately and eventually in the U.S.” Until now, China has been largely boxed out of stable energy markets by suspicious partners and an American stranglehold on supply, forced to seek oil and gas in places its Western rivals preferred to avoid, places like Angola, Iran, Iraq, Sudan and Venezuela. Beijing has proved adept at courting such regimes, but many are deeply corrupt and come with variables like whimsical leaders, civil wars and the possibility of United Nations sanctions.
Having to do deals with gunfire in the background also made China’s leaders feel excluded from the big leagues, despite the country’s economic rise. They wanted in, and Nexen ends a bitter string of failed attempts by Chinese state-owned firms to buy up big Western firms, including an $18.5-billion CNOOC offer for Unocal in 2005 that collapsed under opposition from U.S. lawmakers. “The oil is obviously just oil, but the sense of national accomplishment when a Chinese firm buys up a Western one is something I think should not be overlooked, especially within that system where such things make for great political credit for the firms involved,” said Scott Harold, an analyst with the Virginia-based Rand Corporation who has written about the overseas expansion plans of China’s SOEs.
The deal – and the list of concessions CNOOC was willing to make, including billions in additional spending and an annual report to Industry Canada – is also proof of how much more sophisticated it and other Chinese national firms have become since the failed Unocal deal. Mr. Xu said part of the reason the Nexen transaction was successful was that China now understood it needed to provide allowances for variables like public opinion. “We finally identified the big difference between [investing in] the developing world and the developed world. We cannot simply copy our experiences from the developing world, Africa and Latin America, in dealing with the developed world.”
CNOOC officials declined to be interviewed until after the deal is formally closed. Some in Canada have fretted that the whole episode – Mr. Harper’s courting of Chinese investment, followed by the public outcry against CNOOC’s massive offer for Nexen and Mr. Harper’s after-the-fact adjusting of the rules – may have damaged the country’s reputation as a destination for Chinese investment. But there’s little sense of that in Beijing. “I don’t think they dreamt in their wildest dreams that it would be open season [for state-owned enterprises] forever,” said Howard Balloch, a former Canadian ambassador to China who is now chairman of Canaccord Genuity Asia, an investment bank. “I think the Chinese probably think this is really smart policy … it’s the best outcome that they dared hope for.”
Mr. Balloch says some Chinese officials were privately worried that Mr. Harper would not approve the deal; a step that he said would have affected the entire Canada-China trade relationship. “Of course there would have been repercussions,” he said. Canadian investors in China are instead now hoping to cash in on the warm post-Nexen vibe, which has raised hopes that Beijing will finally grant the reciprocity Ottawa has made clear it would need to be part of the quid pro quo going forward. No one expects Canadian oil firms will now be allowed to buy their Chinese counterparts, but there’s optimism about a breakthrough in the financial services sector, where Canada’s banks and insurers have long been pushing for greater access to the Chinese market.
“The overall situation is still going to be very good,” said a Beijing-based lawyer involved in foreign mergers and acquisitions who asked not to be named. He said several deals were close to being approved that would be considered “major” in Canada, though less significant in terms of the size of the Chinese market. “The Chinese are not going to burn the bridges just because of this [no more SOE takeovers in the] oil sands thing.” Mr. Harper’s new line against state-owned enterprises may also have an unplanned effect on the economic reform debate within China. If state-owned enterprises are considered unwelcome by Canada – and that precedent spreads to other Western countries where China wants to invest in oil and gas properties – it bolsters those who argue that Beijing needs to end the state’s monopoly on the energy sector.
“If this policy is real, it’s a bad thing for the SOEs,” said Li Dongchao, a journalist with China Business News who has been covering the CNOOC-Nexen story. He said that while most Chinese were proud to see a company like CNOOC expanding abroad, there was a widespread feeling that the state-owned giants were hampered by corruption and poor management, and that few benefits from the success of CNOOC or its larger cousins, China National Petroleum Corp. and Sinopec, trickles down to the public, the companies’ theoretical owners. “People think maybe we should break up the monopoly system and allow more room for private entities,” Mr. Li said.
Mr. Harper’s new rule – based on what little he’s said about it so far – seems to be designed to say just that: Chinese investment is welcome, just not Chinese investment directed by the Politburo. “Because of the revision of the investment policies in Canada, I believe more private companies from China will push deals with Canadian companies,” said Mr. Xu, the academic and government advisor. “This deal, this bridge with Canada, is such an opportunity for China to push economic reform.”
However, Mr. Xu said China had also keenly noted the provision for another oil sands takeover by a state-owned company under “exceptional circumstances.” But don’t expect a Chinese government enterprise to propose another deal the size of Nexen any time soon. “I would think that an oil sands application [by an SOE], which is not ruled out, will not appear for some time,” said Mr. Balloch, the former ambassador. “It would be nuts to put the Canadian government up against the wall right now and say ‘this is an exceptional circumstance.’ It would get turned down. That’s a public reaction reality.”
From currency manipulation and abusive trade policies, to slave labor and deadly consumer products, China's ruthless rulers threaten the livelihood of the citizens of every developed nation. These thugs have created a frightening amoral society ruled by a constant fear hidden to outsiders and bought off with the ill gotten profits of a myopic quest for economic advantage at any cost – social, environmental, or civil rights concerns be damned. Worse, as with everything else, China is scaling and exporting the model around this world, threatening their neighbors and exploiting developing nations across the globe with a new imperialism."
It wasn't that long ago that Progressive Moulded Products Ltd., a Toronto-area manufacturing company, announced it would be slashing 2,000 jobs. The job cuts came after 11 Toronto-area plants, which made plastic trim parts for General Motors, Ford and Chrysler, were abruptly closed. It was reported at the time that Progressive Moulded plant machinery was shipped to China while the employees were outside the building...hoping to get their jobs back and now an American company that lost out in its bid for the assets of a failed, federally backed battery maker is appealing a judge’s decision last week selling the company to a Chinese competitor, according to Jim McElhtton of the Washington Times
The sale of A123 Systems, which went broke despite a nearly quarter-billion-dollar federal grant, to Chinese-based Wanxiang has prompted critics in Congress to urge the federal government to intervene and block the sale on national security and other grounds. Milwaukee-based Johnson Controls filed its appeal with the U.S. Bankruptcy Court in Delaware early Monday, saying the company should have been paid a so-called breakup fee and expense reimbursement in the deal selling A123.
The company also said it’s ready to make another bid for A123 if the deal with Wanxiang falls apart — which remains a possibility.
“Should the sale of A123 Systems to Wanxiang not be completed for any reason, Johnson Controls remains open to considering future opportunities to acquire relevant portions of A123’s assets, keeping this critically important technology in the United States, preserving jobs and furthering the purpose of the American Reinvestment and Recovery Act,” said Johnson Controls’ President Alex Molinaroli. While A123 received approval for a $249 billion federal grant through the recovery act, it only received about half of the money before filing for bankruptcy protection earlier this year. The funds were intended to create thousands of American jobs, but a review by The Washington Times of government job tracking data showed only about 400 new jobs were created.
A bankruptcy judge gave approval last week for Wanxiang to buy most of A123’s assets, though the failed battery maker’s government contracting business would go to another company based in the U.S. under the deal. The $257 million sale, however, still requires approval from the Committee on Foreign Investment in the United States, a federal entity charged with reviewing proposed sales of U.S. companies to foreign buyers. Soon after a judge approved the deal, A123’s chief executive, David Vieau, issued a statement backing the sale to Wanxiang even as some politicians in Washington continued raising concerns.
“We believe the acquisition by Wanxiang will provide A123 with the financial support necessary to strengthen our competitive position … and we look forward to completing the sale,” Mr. Vieau said. But Republican Sens. Chuck Grassley of Iowa and John Thune of South Dakota issued a joint statement last week calling for a “full review” of the bankruptcy transaction by the federal government. “In the end, the taxpayers will be left having to repay interest to China for a business that a Chinese company now owns,” the lawmakers said.
To get a clear perspective about what is behind this smoke and mirrors, may I suggest that you read "Death by China", a new release by Financial Times Press, a Pearson imprint. The book by Peter Navarro and Greg Autry challenges the dominant paradigm of a "Chinese Miracle", the one featuring a modernizing, progressive Chinese state heading toward political reform and driving global economic growth with its new found embrace of capitalism and freedom.
Tearing this delusion away, Death by China documents the myriad ways that a powerful, wealthy, and corrupt Chinese Communist Party emboldened by a growing nationalistic frenzy is becoming the biggest threat to global peace, prosperity, and health since Nazi Germany.
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