Neither governments nor investors have much to gain by prohibiting foreign bidders from competing for assets
Understanding China’s opaque decision-making process is sometimes as hard as deciphering a sentence written in Mandarin. But these days it is China who could be forgiven for feeling a bit lost.
On one side of the Atlantic, Beijing is unambiguously welcome. The UK government last month rolled out the red carpet for Xi Jinping, the Chinese president, keen as it was to usher a “golden era” in its relations with the 1.4 billion-strong country. And it matched rhetoric with money, starting with a £2 billion (€2.8 billion; $3.0 billion) guarantee to nudge China General Nuclear Power into funding part of the £18 billion Hinkley Point nuclear plant. The state-backed firm owns 33.5 percent of the project, which it is building alongside EDF of France.
On the other side of the ocean, Beijing is quite visibly loathed. Anything that looks like Chinese investment is anathema to many Republicans – but Democrats are sensitive to the issue too, as is evidenced by the Obama’s administration awkward attitude towards the China-led Asian Infrastructure Investment Bank. Direct investors from the Middle Kingdom were wary after Washington blocked CNOOC’s efforts to buy Unocal, a US oil firm, in 2005. But it has happened again since: Obama revoked a Chinese company’s acquisition of four wind farms in 2012 (a decision that was overturned in court last year). Several big IT deals have been under a similar threat this year.
On the other side of the planet, well, it’s complicated. Nothing prevented China Merchants from teaming up with Hastings Funds Management to acquire the long-term lease of Australia’s Port of Newcastle for A$1.75 billion (€1.19 billion; $1.26 billion) last November. But a A$506 million contract to operate Port of Darwin, awarded to China-based Landbridge Group in October, made a lot of waves after it emerged that the deal had gone through without a full due-diligence by Australia’s Foreign Investment Review Board. A consortium including State Grid of China was allowed to compete in an auction to run New South Wales’ power grid this month – but the move sparked questions for the government.
So who’s got it right? Western governments have legitimate concerns about security, and some of them, like cybersecurity, have particular resonance in the Chinese context. They shouldn’t mute them for fear of losing business, just as they shouldn’t refrain from upholding the values they defend when Beijing visitors are around. Speaking about them “behind closed doors”, as the UK government said it did during Xi Jinping’s visit last month, is probably not enough.
But using security issues as a pretext for ruling out any significant Chinese investment – or creating enough uncertainty around them to make Chinese investors feel ill-at-ease – is a mistake. In the coming years, there will be other cases where Western governments and corporates will seek to raise money by offloading assets of lesser strategic nature. If foreign investors feel the deal could be held hostage to political sentiment then they just won’t bother placing a bid. The asset may well end up fetching a lower price (if it is sold at all).
Most importantly, such behaviour provides China – and the rest of the world, for that matter – with easy ammunition to accuse the West of practising double standards. As Western investors seek to expand to new geographies, including emerging markets, such a climate does not bode well: they too could find themselves confronted with political and regulatory barriers as they attempt to buy assets overseas.
Australia thus seems to have the most astute approach to the question – at least for now. It leaves investors of all origins free to bid for assets, unless these are deemed “strategic”. When they are, it doesn’t systematically not prohibit foreign ownership, but simply limits it to a maximum of 50 percent per single overseas investor. Of course, the devil is in defining what counts as strategic. Perhaps it made sense for Canberra to block the sale of farmland three-quarter the size of the UK to a Chinese company last week; whether critics are right to consider the Port of Darwin deal as part of a grand Chinese scheme to control Asian seas is open to question.
Whatever the answer, it did not prevent the government of New South Wales from reaping about $7 billion in net proceeds from the sale of TransGrid. Notwithstanding the asset’s size and significance, this shows that going ahead with an open auction was a good idea. No mystery about it.