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Monday, February 25, 2008

China welcome on Wall Street, but foreign acquisitions still provoke unease

Joe Mcdonald, The Associated Press
BEIJING - Flush with hundreds of billions of dollars, China Inc. is still having trouble investing abroad, running into foreign security worries as it tries to acquire companies and resources.

The latest casualty: A deal by a Chinese maker of telecom gear and an American private equity firm to buy U.S. tech company 3Com.

The bidders say they just want to make money. But acquisitions are a political minefield because many Chinese buyers are owned by or close to the communist government, feeding fears that Beijing might gain access to military technology or control of strategic resources.

"Where it looks purely commercial, everyone finds that acceptable, but where it touches on resources or security concerns, it just falls into a different basket," said William Hess, China analyst for the consulting firm Global Insight. "As soon as politics enters into the equation, it raises the risks for all parties. It's not just a business case."

The arrest this month of a Pentagon employee charged with selling military secrets to a man accused of being a Chinese spy "certainly doesn't help the political climate in Washington," he said.

On Wednesday, Huawei Technologies Co. and its American partner, Bain Capital, withdrew a request for U.S. government approval of their $2.2 billion bid to buy 3Com (Nasdaq:COMS). The companies said they failed to satisfy national security concerns.

American legislators and officials had expressed concern that sensitive technology could be transferred to China through Huawei's 16.5 per cent 3Com stake. A person familiar with the matter told The Associated Press that Bain offered to sell its Tipping Point subsidiary, which makes network-security software.

China's government said Thursday the Huawei bid was commercial and appealed to Washington to handle it fairly.

"We hope the relevant U.S. authorities can deal with the case in accordance with law so as to create a fair and favorable environment for Chinese enterprises in the United States," said Foreign Ministry spokesman Liu Jianchao.

American opposition to such purchases is prompted by unease about China as a strategic rival, rather than details of individual deals, said Joseph Cheng, chairman of the Contemporary China Research Center at the City University of Hong Kong.

"There is this perception that China is the most serious threat that the United States will face in coming decades, and this perception has coloured the opposition to these mergers and acquisitions," he said.

Unease about China's acquisitions extends to Europe, Australia and elsewhere.

It has been fuelled by questions about how China's $200 billion sovereign wealth fund, launched last year, will invest and whether its financial muscle will be used to push official policy.

European Union Economy Commissioner Joaquin Almunia said in September the EU might restrict investments by such funds if they fail to disclose more about what they invest in and why.

On Sunday, Australia issued new foreign investment rules, saying it would look more favourably on proposals by state-controlled entities that operate on a transparent and commercial basis.

Such investors might "pursue broader political or strategic objectives that could be contrary to Australia's national interest," the guidelines said.

China burst onto the acquisitions scene when computer maker Lenovo Group agreed in December 2004 to buy IBM Corp.'s (NYSE:IBM) personal computer unit in a US$1.75 billion deal. Some critics cited possible security risks, but the sale went through after U.S. regulators apparently decided PCs were too generic to pose a threat.

The following year, state-owned oil company CNOOC Ltd. ran into a firestorm when it tried to buy Unocal Corp. CNOOC dropped its bid for the U.S. oil and gas producer after opponents said it might endanger energy security.

Since then, China has refined its strategy, trying to shield itself from criticism by forging partnerships with U.S. and other companies to make sensitive investments.

Last year, state-owned China Development Bank invested in Barclays PLC and committed financing to the British bank's takeover bid, ultimately unsuccessful, for Dutch rival ABN Amro.

In January, state-owned Aluminum Corp. of China teamed up with U.S.-based Alcoa Inc. (NYSE:AA) to buy 12 per cent of Rio Tinto PLC, (LSE:RIO) complicating a bid for the mining giant by Australia's BHP Billiton Ltd. (NYSE:BHP).

Huawei, the 3Com bidder, exemplifies the ambiguous status of Chinese companies.

The company says it is private, but its founder and chairman is a former soldier and early customers included China's military and state-run phone companies. Huawei adds to the mystery by declining requests for interviews and information.

"Even when Huawei and other companies say they're not connected to the government, no one really believes them, in Huawei's case with good reason, because it has deep ties to the military," Hess said.

China's purchases of overseas assets have soared over the past two years as Beijing encouraged companies to go abroad in hopes of reducing reliance on export-driven manufacturing.

Chinese acquisitions in the United States rose to US$226.6 million last year, more than 16 times the 2006 level of $13 million, according to research company Dealogic PLC. So far this year, another $162.7 million in deals have been announced.

Most passed without comment, such as Wuxi Pharma Tech Inc.'s $163 million purchase of AppTec Laboratory Services Inc., a supplier of medical tests in St. Paul, Minnesota.

In December, Wall Street welcomed a $5 billion investment by China's sovereign wealth fund in Morgan Stanley that helped replenish the bank's assets after heavy losses in risky mortgages.

In Europe, Chinese acquisitions last year totaled $563.2 million, according to Dealogic.

European and U.S. state governments states eagerly try to woo Chinese money. Last year, Alabama Gov. Bob Riley brought a 50-member delegation of businesspeople to China to meet potential investors.

Despite such lobbying, China's elite will take the failure of a 3Com bid as proof the United States wants to slow their country's economic and technological rise, Cheng said.

"It will certainly reinforce the image that the United States doesn't want to see a strong China," he said.

© The Canadian Press, 2008

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