Chapter 25 Why foreign investment is blocked in China

In 2006, in China's business circles, public opinion circles, and even government agencies, there was a call for restrictions on foreign investment.The reason is: if there are no restrictions on the continuous flow of foreign capital into China, it will pose a threat to China's industrial security.What forces are driving the trend against foreign mergers and acquisitions?What impact will this have on the practice of foreign capital mergers and acquisitions in the future? ◎Reporter: Talking about the great controversy over foreign mergers and acquisitions in 2006, we first thought of a question: it is also foreign capital, why do people seldom oppose foreign direct investment, but have such strong resistance to enterprise mergers and acquisitions?

Chen Zhiwu: Since the Westernization Movement, China’s opening up to the outside world, due to the influence of agricultural social thinking, has a tendency to always feel that it is necessary to introduce hard achievements such as "science and technology" instead of soft achievements such as foreign management and culture.From this point of view, industrial enterprises can kill two birds with one stone when investing in China, bringing both capital and science and technology.In contrast, if foreign capital enters the service industry or management industry, it seems that it cannot increase the "technical content".Therefore, our opening to the outside world often welcomes direct investment from manufacturing companies and welcomes them to set up factories, but does not welcome financial investment.

From the perspective of foreign investors, when any country first opens up to the outside world, financial investors are often very cautious.Like private equity funds, open-end funds, etc., this kind of financial investors are often "passive investors", not direct investors, mainly provide capital, not technology, and basically do not send people to directly operate investment projects manage.Because of this, they care more about whether the local legal environment and corporate governance environment are sufficient for them to hand over money to local companies for use.Therefore, in the early days of China's reform and opening up, overseas investment funds were reluctant to invest in China due to lack of security expectations.

Things have changed in recent years.On the one hand, there are already many industrial-type foreign enterprises making direct investment in China, and the investment space of many industries is becoming more and more saturated.On the other hand, foreign investment funds and private equity funds have also found that China's legal environment and business environment have improved a lot compared with 10 or 20 years ago, which is enough for them to invest money in with confidence.Therefore, in the past one or two years, more and more private equity funds and other financial investors have entered China, and there have been a large number of corporate mergers and acquisitions.This is an important background for the debate on foreign mergers and acquisitions in 2006.

◎Reporter: In your opinion, what is the main force driving the opposition to foreign mergers and acquisitions?Is it profit-driven or idea-driven? Chen Zhiwu: It should be said that there are two aspects.In our social ideology and textbooks, certain anti-Western and anti-market principles run through.For example, market transactions do not create value, but a zero-sum game in which buyers and sellers earn and I lose; the prosperity of Western countries is based on plundering and exploiting colonial wealth; the entry of foreign capital is another form of aggression; If you do not maintain the advantages of domestic enterprises in the economic field, you will become a vassal of developed countries, losing economic security and political independence.After long-term indoctrination, this kind of concept has taken root in the minds of most people and has become their standard for observing and judging things.

However, as a kind of commercial competition, enterprise mergers and acquisitions will always result in some losers.For example, the management team can be easily replaced after a merger and acquisition. They want to keep their jobs and get their own powers; manufacturers in the industry are worried about the emergence of a more efficient and powerful competitor; or the government officials in charge of the industry , they want more approval rights.For their own benefit, these people will definitely oppose foreign mergers and acquisitions or set up obstacles for them.But when they do this, they can only use the name of national industrial security and economic security, otherwise it is impossible to get support.It is difficult for ordinary people to grasp the pros and cons of foreign capital M&A. The standard they use to judge this phenomenon is the wrong concept they have been instilled, or they are easily confused by slogans such as "national economic security".Therefore, under the inspiration of such slogans, voices against foreign mergers and acquisitions can easily become a trend.

◎Reporter: So what are the benefits of foreign mergers and acquisitions?I remember you talked about the role of investment fund mergers and acquisitions in improving the efficiency of Chinese companies.If it is not from the perspective of investment funds, but from the perspective of mergers and acquisitions of companies in the same industry, what benefits does foreign capital mergers and acquisitions have for us? Chen Zhiwu: From a formal point of view, regardless of the mergers and acquisitions of industrial capital in the same industry or the mergers and acquisitions of investment funds, the possible benefits are various.For example, if the German Schaeffler company acquires the Chinese Luoyang Bearing Group, it may expand the sales channels of Luozhou Bearing, and make the original Luozhou products go out of China and sell in many parts of the world; and the expansion of output and scale will bring The advantages in purchasing, etc., also allow Luozhou to create new jobs and allow the country to get more tax revenue.

Fundamentally speaking, the principle of creating value is the same whether it is an M&A in the same industry or an acquisition by an investment fund.What private equity funds do is to study every day to see if any company has become an inefficient organization that does not consider the interests of shareholders. Once they find that a company controls valuable assets and will not use them, they will buy them out. These assets undergo personnel or operational restructuring to increase their value, and then resell them.The same is true for horizontal mergers and acquisitions. When an enterprise finds that the assets controlled by another enterprise are not being used to their fullest potential, it will acquire these assets so that these assets can create greater value under its own operations.

In the bidding of corporate assets, whoever bids the highest price shows that whoever is most confident in bringing the highest use value to these assets, otherwise he is just wasting his own money.The process of mergers and acquisitions means the improvement of enterprise efficiency.At the same time, consumers will get more satisfactory products, the government will get more taxes, workers will get higher wages, and the whole society will benefit.Therefore, some people oppose foreign mergers and acquisitions in the name of industrial security, but they are actually betraying the public interest.It is difficult for ordinary people to understand this.I hope that more people can wake up and realize that the vested interests of certain industries and enterprises are different from the interests of the general public. Don't be easily deceived by the remarks of interest groups, and don't know when they are betrayed in the end.

◎Reporter: The failure of CNOOC to acquire Unocal in 2005 is a very bad example.Many people think that the United States, which claims to have the freest economy, also intervenes in foreign mergers and acquisitions?Why can't China do this? Chen Zhiwu: Indeed, in this matter, some members of the US Congress have discriminated against Chinese companies in order to gain political capital, which has had a very bad impact.But we should also consider the problem from the other side: Is it because others have made mistakes that we should also make mistakes?Is it because the U.S. Congress blocked CNOOC's merger and acquisition, and we should also keep Carlyle out of the door?Is it better or worse for China to do so?Obviously, just because we are a developing country, we need to attract foreign investment and free trade more.We cannot "become bad" because others "become bad".That's not a wise thing to do.

In addition, the case of CNOOC reflects the core problem that China's international soft power is too weak, which makes overseas mergers and acquisitions of Chinese companies easy targets for local politicians, providing them with opportunities to gain political capital.Why is international soft power so weak?It is because China's image overseas is somewhat lacking.Specifically, it is mainly related to our political system and political values.The domestic media doesn't talk about this much, but it is a fact.Therefore, if Chinese enterprises want to "go global" smoothly, they need to be accompanied by the continuous improvement of China's social system and international image. ◎Reporter: After the introduction of new regulations on foreign mergers and acquisitions on August 8, 2006, operations at the enterprise level have also undergone changes. For example, Carlyle has substantially revised its acquisition agreement with XCMG.What do you think of the impact of the new foreign M&A regulations on corporate M&A practices? Chen Zhiwu: There must be an impact, and it is negative.The main result is that the power of the Ministry of Commerce has been greatly increased. In the future, many aspects of foreign mergers and acquisitions will be approved by the Ministry of Commerce. The chances of officials being "treats" and bribed have greatly increased.At the same time, it adds a lot of transaction costs for Chinese and foreign companies carrying out mergers and acquisitions, increasing the uncertainty and delay of transactions.In short, the efficiency and transaction environment of corporate mergers and acquisitions have taken a step back.However, these measures often fail to block transactions that should be blocked, while transactions that should not be blocked are blocked, because the former is often more relevant, while the latter may not be particularly relevant.Government regulation is like this. It often cannot control the "bad people" that should be regulated, but it can control the "good people" that should not be regulated. On the other hand, for local governments, they need to be responsible for local employment and income, and they will definitely try their best to help local enterprises avoid these regulatory obstacles.So after the introduction of the new rules for foreign mergers and acquisitions, my first reaction was that local governments, including provinces, autonomous prefectures, and municipalities directly under the central government, would definitely not follow them.They will try their best to prevent the implementation of the new regulations, and even help relevant companies to conduct public relations with the Ministry of Commerce.Because it directly involves whether local enterprises can utilize foreign capital, whether they can generate more employment opportunities, and whether local GDP and local tax revenue can increase, etc., which are the most concerned issues of local governments. We all know that the financing capacity of China's state-owned banks and capital markets is very poor, and bank loans are not so easy to obtain at the local level.Therefore, attracting foreign investment as much as possible and with the most relaxed environment has always been a major factor for local economic growth.Now that the new rules on foreign mergers and acquisitions come out, local governments must have their own countermeasures to block this approach.Officials in central government departments can relatively care about abstract policy goals, but local governments are different. They must solve employment and local taxation problems for local people, and the indicators for measuring their work are very specific.This is why central and local ideas tend to be different.This is the situation that should be seen. ◎Reporter: Does this mean that the cases of foreign mergers and acquisitions will continue to increase? Chen Zhiwu: I expect more.Because after all, there are too many inefficient enterprises in China.I have been to Wuxi once, and I saw the Wuxi Municipal Government Guest House, which is located on the edge of Taihu Lake, with a good location, surrounded by mountains, and a lake below, and the community inside can swim.Those places are valuable in themselves, but the value of the output is very low.There are too many guest houses like this, as well as assets owned by state-owned enterprises and state-owned units in various parts of the country.If I were a private equity fund, I would also try to find a way to buy these assets to develop their potential value.There is still a lot of space for this.Although the new foreign investment policy has greatly increased the obstacles to mergers and acquisitions and industry integration, the number of foreign capital mergers and acquisitions will continue to increase because there is still room for China's economic development and so many inefficiently used assets.