UNWELCOME LIQUIDITY

China Investment Corp (CIC) chief Lou Jiwei, and others charged with overseeing the deployment of China's vast foreign exchange reserves in international markets, might perhaps feel a little piqued by news that countries including Australia are only now considering drawing up codes to determine how they should respond to sovereign wealth funds. After all, sovereign wealth money – and, indeed, its interaction with private equity – reaches back several decades. China may not view it as a coincidence that attitudes seem to have hardened roughly in parallel with the publicisation of its own global investment ambitions.

The Chinese may also have identified a certain irony in the occasional criticism that it is failing to open up its market quickly enough, or broadly enough, to Western investors. Such criticism comes at a time when it finds the doors to certain markets in the West being slammed shut. Such protectionism seems all the more ironic – and potentially counterproductive – given that it coincides with a liquidity drought and banking crisis in the West so severe that memories are now being evoked of the 1929 Wall Street Crash and its devastating aftermath. You'd think in this climate that liquidity from any source would be welcomed.

Last month provided a good indication of the hurdles Chinese investors must overcome when the Committee on Foreign Investment in the United States (CFIUS) cited security fears as a reason for failing to give approval for Bain Capital's planned acquisition of network equipment maker 3Com Corp. CFIUS expressed security fears because Bain's partner in the deal was Huawei, a Chinese telecom equipment maker, which stood to gain a minority stake of as much as 16.5 percent. Of particular concern was 3Com subsidiary Tipping Point, a national security software manufacturer that formed part of the deal and which CFIUS was unwilling to see fall into foreign ownership (or, more accurately, partial foreign ownership).

Whatever the rights or wrongs of the decision, some of the rhetoric accompanying it appeared aggressive in nature. Making the loudest protest against the deal was Republican Congressman Thaddeus McCotter, who said blocking it was “not protectionism, it's sanity” in an interview with the Pittsburgh Tribune-Review. “How can Republicans support a Cuban trade embargo and then turn around and support free trade with Communist China?” he asked [arguably overlooking the obligations of belonging to the World Trade Organisation, of which both the US and China are members].

In light of such strong feeling, might Chinese investors retreat into their shells? It seems unlikely given the pressure to invest and a whole host of other reasons that, from a Chinese perspective, make deploying money overseas an eminently sensible strategy. Expect, therefore, Chinese companies not to retreat but to find ways of either avoiding obstacles or making their approaches more palatable.

In fact, such considerations are already well advanced. At a recent conference in Beijing, which was attended by a large gathering of lawyers, academics, executives and government officials, a number of proposals were put forward designed to assist Chinese companies invest successfully in the US. These included:

  • • Incorporate social, cultural and political factors into investment decisions.
  • • Develop a media strategy and communicate the positive impact of your investment.
  • • Avoid trophy investments. Chinese companies should be familiar with the “hot button” issues in the US and how to avoid them. [Interestingly, in light of 3Com, considerable caution is recommended in the case of deals that may be seen as perceived threats to national security].
  • • Reach out directly to Congress – the White House and Cabinet members aren't the only authority in Washington.
  • • Consult early with CFIUS.
  • • Be mindful of legal and regulatory trends [such as the Department of Commerce's recent expansion of the list of goods prohibited from export because of their potential military application].
  • • Examine the tax implications of any US investment.
  • • Head off patent lawsuits. Chinese companies need to ensure they can demonstrate their own R&D if a dispute arises.
  • • Better exploit free trade agreements to gain market access.
  • As a final observation, it's interesting to note the reported comment of a senior official of CIC at a conference in San Francisco last year that CIC would avoid any investment in the US that would qualify for a CFIUS review. Don't expect Chinese companies to call a halt to their desired overseas expansion. Do expect greater sophistication.