Growth5 Blog

Friday, March 20, 2009

Is China Hurting Themselves By Blocking US Investments in Chinese Companies?

"Wait a second, don't you owe us like a trillion dollars?" - not a quote from China's minister of commerce, Chen Deming. But it should be.

From this WSJ article: "Lawyers and investment bankers said China's rejection of Coca-Cola Co.'s $2.4 billion bid for China Huiyuan Juice Group Ltd. could prompt a backlash against Chinese investing abroad as it risks chilling investment within the country."

Question: How Do You Say "Tit for Tat" in Chinese?

Two important factors the Chinese economy is dependent upon:

a) how China performs in the global market; and
b) how the US performs in the global market.

Blocking this deal from Coke could hurt both a & b above... "perceptions that China is hostile to foreign investors could hurt Chinese companies looking to take advantage of low prices to invest abroad, particularly in oil, metals and other natural resources that Beijing sees as critical to sustaining the nation's economic growth."

Like it or not, China needs the US to succeed, they have a trillion dollars riding on it.

Some analysts think this rejection is in response to the US blocking Chinese govt-controlled Cnooc Ltd. from acquiring Unocal Corp. of the U.S. for $18.5 billion in 2005. "While Cnooc's deal-making inexperience contributed to its difficulties, opposition from U.S. lawmakers surprised China and left many in the country believing the U.S. wouldn't stand by its own open-markets rhetoric."

For the sake of both economies, China and the US are going to have to find ways to do business together. Trust is an important factor.

This Forbes article points out that there are conspiracy theorists within China who "suspect that the (US) Federal Reserve essentially prints more money not just to stimulate the economy, but also to devalue China's U.S. dollar portfolio, undermining a rival power...

It devalues the one currency China is most heavily invested in and pegged against. That forces China to continue buying U.S. dollars both to keep the value of its currency down and to protect its portfolio, so China ends up helping finance the U.S. economic recovery plan."

Make no mistake, we are fortunate that China is in the position they are in. We would be much worse off without them. Closer to home, our firm has a portfolio company that has been trying to raise money in the US & Europe during these trying economic times. Recently, two strong candidates emerged from a referral source. They are both capable of doing a deal and are prepared to act quickly. They are both Chinese investors.

What do we care that they are Chinese investors investing in a US business? This business will create jobs in both the US and China, the Chinese market is twice the size of the US market for this business. If the project is successful, there will be plenty of money spread around both countries. The taxes we will pay in the US can help pay back the US debt to China. Wouldn't that be true of the Coke/Huiyuan Juice deal as well? Isn't this the way it should work?

I will close with a quote from the Forbes article - some unsolicited advice on what China's motivation should be to work with the US moving forward:

"It's the old debtor's aphorism, writ on a sovereign scale: If you owe China $1 billion, it's your problem. If you owe China $1 trillion, it's China's problem."

Answer: 针锋相对 ("Tit for Tat" in Chinese according to Google's translation tools)

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