China should resist urge to go on overseas buying spree

Little noticed during last weekend’s milestone summit between Presidents Barack Obama and Xi Jinping was another landmark event: China’s currency hit a record high, reaching almost 6 yuan (S$1.20) to the United States dollar.

In recent years, one of the few things Republicans and Democrats could agree upon was that an artificially cheap yuan damaged US exports and stole US jobs. The currency’s climb thus seemed like a nod from China’s President to America’s, a quiet signal that Mr Xi understands how sensitive the issue is. During Mr Obama’s time in office, in fact, the yuan has risen more than 10 per cent in value. Talk of a currency war has faded.

Of course, a stronger yuan means a different kind of problem for Corporate America. This will dawn on executives as they begin to see the prefix “+86” — China’s country code — on more and more incoming phone calls. Just as Chinese consumers now have more money in their wallets to spend, so do Chinese companies. They could well embark on a shopping spree far more earthshaking than the Obama-Xi summit.

The recent bid by Shuanghui International Holdings to buy Smithfield Foods has brought this possibility into sharp relief. The deal, which at US$7.1 billion (S$8.9 billion) including debt would be the biggest Chinese acquisition of a US company, has prompted frantic machinations on Capitol Hill.

Politicians have managed to turn the proposed buyout of a hog producer into a threat to national security. Just imagine the reaction if cash-rich Chinese companies start to go after banks such as Goldman Sachs Group, or iconic US manufacturers such as Boeing and General Electric. China can surely do better than provide sweatshops for Apple and Wal-Mart Stores. Why not own them outright?

ATTRACTIVE DEALS

There are several reasons such bids are becoming increasingly attractive to Chinese leaders. As the all-important manufacturing engine burns out, officials in Beijing are desperate to diversify sources of growth. China needs to modernise its economy, boost innovation and create well-paying jobs. It has to feed 1.3 billion people and gain access to energy and raw materials.

What a strengthening yuan takes away from exports, it adds in global purchasing power: A struggling American company such as Smithfield is now 12 per cent cheaper for a Chinese executive than it would have been five years ago.

Mr Xi and Premier Li Keqiang could spend the next 10 years working to create a stable of globally competitive names — a Chinese Microsoft or Toyota. Or, they could put that stronger yuan to work and bypass the tedious process of indigenous-brand making.

Don’t forget that China has US$3.4 trillion in currency reserves to use as a war chest. Chinese savers face a dearth of investment options, so their money is the state’s to invest.

Such a buying binge would put the US in a difficult position. Mr Obama can’t preach the gospel of openness and transparency, while rejecting deal after deal on national-security grounds. In China, cries of hypocrisy would surge along with anti-American sentiment. The acrimony could easily scuttle hopes created over the weekend in California that Mr Obama and Mr Xi can put the Cold War mentality aside and work together.

The greatest victim of a global mergers-and-acquisitions assault, however, would be China itself. The country’s more than 100,000 state-owned enterprises continue to dominate the economy, generating as much as half of gross domestic product in recent years. They enjoy generous subsidies and cheap financing — both of which would greatly aid any buy-out attempts.

While there is nothing to stop private Chinese companies from also seeking to take over foreign brands, in reality they would be outgunned. For the most important deals — where the target controls critical technology, a powerful global brand, or both — China is almost certain to favour a state buyer over a private one.

This is the last thing the Chinese economy needs. State-directed businesses tend to misallocate credit and restrain entrepreneurship. Communist Party bigwigs and executives at state-owned companies happily skim profits into their own bank accounts. State companies rack up piles of unhealthy debt, knowing the government will ultimately be forced to bail them out.

REAL RETOOLING

Instead of trying to build up national champions, Chinese leaders should be focused on creating a more dynamic economy. They should start by reducing barriers and red tape so that private companies can better compete in industries where the state currently enjoys a monopoly. A more transparent bidding process would lead to more efficient growth. Rather than reviving inefficient enterprises by slapping a global brand on them, the government should be looking for ways to stimulate home-grown innovation.

Until now, resistance to Chinese business abroad has largely revolved around issues of governance. In its global quest for customers and especially natural resources, China has blithely supported unsavoury regimes, altered the rules of trade, and run roughshod over ecosystems from Asia to Africa.

Chinese businesses have alienated more than just Americans: In late 2011, Myanmar President Thein Sein underscored his country’s dramatic turn towards the West by scrapping a huge Chinese hydroelectric-dam project that had spurred local protests.

However tempting a shopping spree might be, Beijing officials must discourage one. Mr Xi has pledged to retool an economy out of step with the tenets of modern capitalism. If he is sincere, he needs to reduce the state’s role, instead of using a stronger yuan to expand and export it. BLOOMBERG

About the author:

Tokyo-based William Pesek won the 2010 Society of American Business Editors and Writers prize for commentary.