“I fear the Greeks, even when they are bringing gifts,” the Roman poet Virgil wrote 2000 years ago. Substitute mainland China for Greeks, and you have a pretty accurate picture of the response to Chinese foreign direct investment in many Western countries, particularly those in North America.
Two recent deals, one in Canada and one in the US, highlight the tensions between the bringers and the recipients of Chinese FDI. And the tensions are likely to continue as planned acquisitions line up.
On the one hand, China's investment is very welcome – especially at a time of high unemployment and slow growth. According to the NY-based advisory firm Rhodium Group, 2012 was a record year for Chinese investment in the US with deals amounting to $6.5bn, compensating for a slump in investment from other countries. FDI into Canada totalled C$10.9bn ($10.7bn) in 2011.
On the other hand, there is concern and even suspicion about the motivations behind the acquisitions, especially if the Chinese acquirers are state-owned enterprises (SOEs), as many are.
Distrust has risen with ongoing serious accounting and audit problems in a number of the Chinese companies that have used reverse mergers to go public in the US. Such acquisitions are especially sensitive given the allegations of intellectual property theft, corporate espionage and computer hacking, and the fear that the Chinese government is using SOEs to advance its own goals in North America.
In December 2012, the Canadian government announced that it would allow China National Offshore Oil Company (CNOOC) – a company owned by the government of China – to acquire the Canadian oil and gas company Nexen in a cash deal valued at $15.1bn.
But even as his government signed off on the deal, Canadian prime minister Stephen Harper simultaneously laid out tougher new guidelines for foreign investment by SOEs in Canada, noting “the government’s concern and discomfort”. He says: “When we say Canada is open for business, we do not mean that Canada is for sale to foreign governments.”
Because Nexen’s global operations include oil leases in US waters in the Gulf of Mexico, CNOOC also sought approval of the deal from the Committee on Foreign Investment in the US (CFIUS), a US government agency. For this, CNOOC had to prove the merger would not compromise US “national security” – a test it appears to have met when CFIUS green-lighted the deal in February 2013.
CNOOC – which in 2005 was forced to drop its $18.5bn bid for a California energy company due to fierce political opposition in the US – voluntarily sought advance CFIUS approval of the Nexen deal. The company argued the transaction was purely commercial and fully consistent with commercial terms in the marketplace.
“You have to convince CFIUS either that there are no national security risks, or that the transaction is structured to address security concerns and that the parties will agree to certain steps to mitigate risk,” says a source.
Two months earlier, a $6m wind farm acquisition by Ralls, an Atlanta, Georgia-based company owned and controlled by the executives of China’s giant Sany Group, failed this test. Sany Group is a private company with close ties with the Chinese government.
When the deal was submitted to CFIUS in 2012 three months after its completion, the agency rejected it on national security grounds. Ralls was ordered to dispose of the properties subject to CFIUS approval. This decision was followed by an order from the US president, Barack Obama, striking down the deal because of “credible evidence” of a national security threat – the first action of its kind by a president in 23 years.
In an unprecedented step, Ralls filed suit against the president, CFIUS and the secretary of the treasury alleging their actions were unconstitutional. In February 2013, a judge in Washington, DC, agreed to consider the purely legal questions about the process followed in implementing the law – but not to second-guess the president’s decision.
Sany has sworn to “fight to the end”. “Dignity weighs more than money,” the company says. Meanwhile, China’s minister of commerce Chen Deming says that China is “watching and investigating”.
US Treasury officials have described the CFIUS approval process as “transparent, predictable and non-discriminatory”. They point out that a CFIUS filing is purely voluntary. And they insist: “CFIUS does not discriminate among the countries of companies seeking to invest in the US, nor among the sectors in which they want to invest.”
The “transparency” claim amuses experts. “They conduct their activities in secret and they don’t tell us what they are doing and we don’t see their documents,” says a source who has helped companies navigate the process.
Mr Chen is less amused. “We really hope this kind of security review could be more transparent, letting companies have more predictability,” he says.
Indeed, “national security” – the sole criterion for rejecting an FDI transaction – is not specifically defined. “Critical infrastructure operations, financial services, technology, electrical transmission, port operations would all be within the scope of CFIUS,” says the source.
Any substantial Chinese investment in energy or infrastructure would generally be submitted for CFIUS review. “If there are any military bases nearby, such as in the Gulf of Mexico, that screams for review,” says the source.
By contrast, the Investment Canada Act seems a model of clarity, although Canadian lawyers say it still leaves room for uncertainty. An FDI transaction must be of “net benefit” to Canada, as measured by its impact on Canada’s economic activity, productivity and innovation, employment, presence of Canadians in senior management, competition and competitiveness on world markets, as well as whether the acquisition is likely to be “injurious” to national security.
Foreign investors are usually required to make specific undertakings, or commitments, as a condition for approval. CNOOC, for example, agreed to establish its North and Central American operations in Calgary, to retain Nexen’s management team and employees, and to list on the Toronto Stock Exchange, among other undertakings.
Still, following the CNOOC–Nexen deal, the Canadian government added tougher restrictions on SOE acquisitions. Purchase of control of oil sands companies will only be considered of “net benefit” in exceptional circumstances, and SOE investments in other parts of the Canadian economy will face greater scrutiny. Free enterprise principles and industrial efficiency will be required of investors “owned, controlled or influenced” by another state.
The new element of “influence” by another state will be a difficult assessment to make, says Peter Glossop, a partner in the prominent Canadian law firm Osler, Harkin & Harcourt. It could cover management dominated by a former official with significant commercial connections with a foreign government or a situation where a government is represented on a corporate board or holds a “golden share” that gives it veto power or special voting rights.
Moreover, even though the threshold for Canadian review of an acquisition by a foreign, private-sector investor is set to rise to C$600m and then to C$1bn of enterprise (market) value over four years, for SOEs the threshold will remain at the current, lower level of C$312m of the book value of assets.
In the US, the level of concern remains high, especially for telecommunications companies. Huawei and ZTE Corp – Chinese companies with long histories in the country – should be viewed “with suspicion” and banned by CFIUS from taking over US companies, the US House Permanent Select Committee on Intelligence said last year.
A number of significant acquisitions by Chinese companies in the US are in the pipeline. But whether they succeed may depend on how well governments are able to discriminate between rational and irrational concerns about such investment.
Race into Africa
"China is all over Africa – I mean, all over Africa. And they are buying up long-term contracts on minerals, on – I mean, you name it. And there're some places where we're not in the game, folks. And we got to get in.”
That was senator John Kerry speaking before a US Senate committee at his confirmation hearing. Nevertheless, a single senator managed to derail a bill with rare bipartisan support that would have mandated a coordinated US strategy to spur trade with Africa and raise the amount the country’s Export Import Bank could lend for investment in Africa.
The US Government Accountability Office estimated that US FDI into sub-Saharan Africa between 2007 and 2011 totalled some $16bn, compared with about $13bn from China, but noted Chinese investment was probably underreported. And in 2011, US exports to the region amounted to only $20bn compared with China’s $58bn.
Some say China’s non-judgemental attitude to the lack of democracy or corruption in host countries gives it an advantage, compared with the “four pillars” on which US policy in sub-Saharan Africa is based: to promote opportunity and development; to spur economic growth, trade and investment; to advance peace and security; and to strengthen democratic institutions.
Or as senator Chris Coons put it on another occasion: “The US government invests in the people of Africa, while the Chinese government invests in the infrastructure of Africa.”
Still, given the high rates of return on FDI in Africa to US investors – 20%, compared with 14% in Latin America and 15% in Asia [according to the US Department of Commerce] – there are strong incentives for US FDI to pick up.