US president Barack Obama ended a decades-long tradition in September 2015 when he decided not to stay in the presidential suite at New York’s Waldorf Astoria hotel because of security concerns over the hotel’s new owner, Chinese insurance company Anbang.
The air of mystery enveloping Anbang’s ownership structure and its rapidly increasing international footprint prompted Mr Obama to end a tradition that has seen the hotel accommodate every US president from Herbert Hoover onwards (notably, Mr Obama had stayed there prior to the sale).
Anbang is not an isolated case. China’s mix of turbo capitalism and strict control by the Communist Party, which can often result in opaque governance and capital structures, is clashing with the disclosure rules of Western markets. More and more deals are being scrutinised on the grounds of transparency, antitrust and security issues, with some observers calling for an overhaul in the way Western authorities deal with Chinese investment.
China’s push to ‘go global’ has intensified dramatically in the past few years as the domestic economy has slowed and Beijing has encouraged local firms to venture abroad looking for new markets and technologies. China has been the top acquirer of foreign companies on a global scale in 2016, with 176 announced deals worth $128.8bn in the first eight months of the year, according to figures from Mergermarket.
European targets alone made up 101 deals worth $76.5bn. At the same time, China has been the second largest source of global FDI after the US with announced projects worth $67.8bn in 2016 through to August, according to figures from greenfield investment monitor fDi Markets.
As the Chinese wave of foreign investment mounts, authorities in Western markets are running more thorough reviews of these deals. “We have begun to notice signs of tightening by local financial services industry regulators, local governments and the Committee on Foreign Investment in the United States [CFIUS], leading some boards to elect not to take the risk of signing a transaction with Chinese acquirers,” London-based merchant banking firm Grisons Peak wrote in July.
Overall, the firm estimates that about $30bn of proposed transactions by Chinese companies were terminated, withdrawn or rejected across several industries on different grounds since November 2015. China’s governance problem means that Chinese investment, either by state-owned enterprises (SOEs) or privately owned enterprises, brings along new challenges for authorities and regulators in the West.
White glove mysteries
The ownership, governance and capital structure of Chinese companies often appears opaque and even misrepresented by practices such as the so-called ‘white glove’, where third parties hold shares and carry out other financial operations in someone else’s name. Anbang itself is legally owned by dozens of villagers from Pingyang County, all in some way related to the group’s president, Wu Xiaohui, an investigation by the New York Times discovered in September.
“White glove structures are a common practice in China,” says one Beijing-based lawyer who spoke on the condition of anonymity. “From a pure antitrust review they may not constitute a non-compliance, because legally they are a clean and valid structure that is difficult to challenge. If target companies have the ability to discover the structure behind [them], they might be able to challenge them, although most of the target companies haven’t got the resources to do that.”
The shroud of opacity surrounding the governance of Chinese companies naturally extends to their real degree of connection with the ruling Communist Party, feeding rumours about the nature and the agenda of their investment.
“We are seeing this huge wave of investment going into Western markets by companies ultimately controlled by the Chinese Communist Party,” says Alan Riley, trade and antitrust law expert and senior fellow at the Institute for Statecraft in London. “This is quite alarming, but not necessarily recognised, and the review system doesn’t exist.”
However, the line between speculation and reality may be finer than it looks. A 2015 paper by US-based professors Curtis J Milhaupt and Wentong Zheng found that “in 95 out of the top 100 [Chinese] private firms and eight out of the top 10 internet firms, the founder or de facto controller is currently or formerly a member of central or local [Communist] Party-state organisations such as people's congresses and people's political consultative conferences”.
Political influence also materialises through the access granted to many companies to cheap state finance, which may raise, at least on principle, antitrust issues in Western markets. “If a company gets a lot of money from state banks, at rates that are not commercial rates, that’s an indication of state influence,” says Mr Riley.
ChemChina’s proposed acquisition of Swiss agribusiness company Syngenta raised such concerns. ChemChina was willing to sign the deal through a highly leveraged financing structure with new loans for about $32.7bn on top of new equity contributions of $25bn.
“ChemChina’s standalone weak financials show it doesn’t have the capacity for the Syngenta deal,” Bloomberg reported Lawrence Lu, an analyst in Hong Kong at Standard & Poor’s, as saying in March. “It is likely to get government support for the Syngenta transaction because the agriculture sector is one of the most important in China.”
Despite these concerns, the deal was approved by CFIUS, which runs national security reviews of proposed foreign investment transactions, and is now seeking antitrust approval by the European Commission (EC). In other countries, the authorities of some sectors are proving more resistant to proposed Chinese transactions.
“Financial services has been one of the sectors where there have been a lot of pushback on Chinese investment,” says Mark Sanders, partner at Hong Kong-headquartered law firm King & Wood Mallesons, referring to a number of failed acquisition by Chinese companies of insurance and banking groups in countries such as Israel and Portugal. “Financial regulators have shown a path through which the opaqueness of these companies has enabled them to conclude that they are not fit for purpose from a capital adequacy perspective.”
Beyond a handful of specific cases, Western authorities are still figuring out a more holistic approach to deal with the challenges raised by Chinese investment.
“The bit where it gets very difficult is disaggregating whether or not the state is involved,” says Mr Sanders. “To what extent is any given SOE connected to all the other SOEs? Once you start aggregating that from an antitrust perspective, as a buyer you may have issues here about proving that you are going to not create some anticompetitive environment.”
The EC embraced this challenge when it reviewed the Hinkley Point nuclear development plan in the UK. The EC questioned the independence of China General Nuclear Power Corporation (CGN) – a partner of French company EDF in the development – from China's State Assets Supervision and Administration Commission (Sasac), which oversees all SOEs, and therefore made a case to consider CGN as part of a broader syndicate of companies led by Sasac for antitrust purposes.
The UK’s newly selected prime minister, Theresa May, eventually approved the project in September, but it appears the debate over the best way to regulate and handle Chinese investment in Western markets is just beginning.