July 4, 2005

The Bull in Oppressive China’s Shopping

NOTE: I’ve blogged about China’s business actions abroad and corporate-assisted censorship at home in some combination posts (here [Question 1], here [1st item], here [final item], and here [1st item]), because I expected these areas to get a lot more attention elsewhere than they actually have.

The concerns are finally jelling, and not a moment too soon. On the day we celebrate our independence, it’s time to make some connections, and note that if current developments continue the sun may soon set on the hopes many have had for personal freedom and representative government in mainland China. Further, over the longer term, our nation’s economic autonomy may be severely compromised.
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Having accumulated hundred of billions of dollars of foreign reserves, and apparently tired of investing it in bonds, the Chinese government, through its state-dominated corporate proxies, has gone shopping.

Earlier this year, Lenovo (majority-owned by Legend Group Holdings, which is controlled by the Chinese government) bought the personal computer business of IBM for $1.75 billion. That deal is done.

The most visible current acquisition attempt is the $18.5 billion bid for Unocal by CNOOC, a 70% Chinese government-owned entity, which so far trumps the bid of logical American acquirer Chevron.

Another more-visible bid is Chinese company Haier’s $1.2 billion bid for Maytag. According to the Christian Science Monitor, Haier has no state ownership, but instead “is a ‘collective,’ with 100 percent of profits retained by the company” (uh-huh).

There are other deals taking place nearly under the radar. Just one local (SW Ohio) example: Bankrupt Huffy Corp., best known for bicycles that used to be made here in Ohio but haven’t been for at least several years, is being acquired by Chinese entities at fire-sale prices, with an outrageous wrinkle:

Huffy Corp. has a reorganization plan that could have the company owned by the Chinese government and Huffy’s Chinese suppliers after coming out of bankruptcy, the company announced Tuesday.

Huffy’s debts will be wiped out under the plan in exchange for new shares to be issued in the company. The Sinosure Group, a Chinese government agency that provides credit insurance to Chinese exporters, including many of Huffy’s suppliers, will own 30 percent of the new shares. Within five years, they may own 51 percent of the company, and the rest of the company will be owned by unsecured creditors. The Sinosure Group also will have the right to elect a majority of Huffy’s board of directors.

Another part of the plan would terminate the company’s pension plan, but 99 percent of the plan’s beneficiaries will not be affected. The Pension Benefit Guaranty Corp., a unit of the federal government that insures pension plans, will take over responsibility for paying out the benefits.

…. Huffy (Pink Sheets: HUFCQ.PK) has about 3,600 retirees and 130 current employees. The company did not return calls seeking comment.

How convenient. A Chinese-controlled group will, in all likelihood, end up with a fresh-start company and pushes about $40 million (text file; go to Page 20) in pension and post-retirement benefits (as of the end of 2003) onto you and me.

How many more of these smaller buys are taking place? My guess is: plenty.

(Sidebar: It also occurs to me that there was, until the Unocal bid, a decided reluctance on the part of the business press to report Chinese state control of the acquiring firms. I naively thought, after some 20 years of supposed attempts at capitalism in China, that these acquirers were already private-sector entities. I’m outraged that they’re not, and I’m ticked that it took so long for these facts to be widely known.)

Here is the fundamental objection to these deals, succinctly and politely put (link is free for the time being):

America’s policymakers have long encouraged China to privatize its state-owned and state-controlled companies. To allow these entities to gain control of U.S. private companies while still in state hands sends the wrong message.

Also, allowing a foreign government to gain control of U.S. companies is clearly not in our national interest and is contrary to America’s free enterprise tradition.

Lastly, state-controlled companies can easily access concessionary funding from their government and the transparency regarding the origins of capital flows is poor and can be easily manipulated.

(Another sidebar: Did the Chinese government orchestrate the Lenovo-IBM deal first, figuring there would be little resistance because the products involved are manufactured overseas, in order to set a precedent that would weaken objections to the other deals, especially Unocal? Isn’t this the exact kind of manipulation that those who fear state-controlled enterprises have warned of?)

All of this is coming at the same time that the Chinese government is cracking down, and hard, on free speech and conduct in everyday life, with the help of American technology, primarily from Microsoft, Cisco, Sun, and probably others. Rconversation is on top of current developments, which are not good. From these observations of a longtime critic, it is clear that the Chinese government plans to rely on comprehensive monitoring to intimidate the populace, using US technology that may be illegal for export:

As you know, the Chinese authorities don’t want to block the web. They want Chinese users to practice self-censorship. Surveillance, and the awareness of surveillance leads to self-censorship and that’s where Cisco comes in. Cisco has built the structure for the national PSB [Public Security Bureau] database, and as of June 2003, it is already resident in every province of China, except Sichuan. Police can access a suspect’s political history, imaging information, the lot, and read their email at will. Cisco calls it “Policenet.”

….. A Chinese policeman or PSB (Public Security Bureau) agent using Cisco equipment can remotely access the suspect’s danwei or work unit, thereby accessing reports on the individual’s political behavior and family history. Even fingerprints, photographs and other imaging information would be available with a tap on the screen. (This wasn’t just a sales pitch: according to Chinese sources, Cisco has built a structure for a national PSB database, with real-time updating and mobile-ready capabilities, and as of June 2003, it was already resident in every province of China, excepting Sichuan)…. the Chinese police could even remotely check if the suspect had built or contributed to a website in the last three months, access the suspect’s surfing history, and read his email. It was just a question of bandwidth.

…… the products that Cisco (and Sun Microsystems) were now selling to China appeared to be directly flaunting the Foreign Relations Authorization Act (Fiscal Years 1990 and 1991), which suspend(s) “The issuance of any license… for the export to the People’s Republic of China of any crime control or detection instruments or equipment” until the President chooses to try to reverse the suspension.”

So, our latest high technology is being used to enable a communist government to perfect its police state. Meanwhile, that same government’s corporate proxies are beginning to make major moves to buy up the portion of our production and industrial base that hasn’t already moved offshore.

Stop, the, madness.

If BizzyBlog were king, Chinese “corporate” attempts at buying our companies, large or small, would be halted until at least these things occur:

  • The Chinese companies attempting to do the deals are truly private-owned entities, and have been so for at least 3 years.
  • US and other foreign companies are allowed to buy Chinese companies outright.
  • The Chinese yuan is allowed to float against other currencies.
  • The Chinese government allows full and unfettered free speech on the Internet and in print, and enshrines that freedom in their equivalent of The Constitution.
  • (largely courtesy of Porkopolis) China must reform its legal and regulatory system to fully protect intellectual property rights, and vigorously prosecute and punish violations.

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UPDATE, July 5, 9:30 AM: In a daily e-mail I get from CNN (not available online), Bill Tucker says: “Let’s be very clear about the China Unocal bid. It is a bid by the Chinese government. Despite what the Chinese say about it being a purely commercial transaction, the Chinese government owns 70 percent of Unocal. If allowed to purchase Unocal, the oil will be sold to Chinese industry at a better than market favorable price, thus insulating Chinese industry from the “energy tax” being suffered by consumers and industries in other economies. Smart, you say? You bet it is. Here’s another smart thing; the Chinese won’t let any foreign buyer buy a Chinese energy or commodity company. Why should we?”