Industries Controlled, China Troubled

In spite of the fast economic growth and bright outlook, China is still threatened by the fact that many of its industries are controlled by the foreigners.

On March 2, the wine brewer Swellfun made a declaration that its largest shareholder Sichuan Quanxing Group (Quanxing) signed on selling 4% of its shares to the international wine giant Diageo. If this deal is approved by the government, Diageo will hold 53% shares of Quanxing therefore it has the direct shareholding on Quanxing and indirect shareholding on Swellfun.

According to the “Catalogue of Industries for Guiding Foreign Investment (Revised in 2007)” issued by the National Development and Reform and the Ministry of Commerce, the high-quality wine brewer should be held by Chinese companies. That’s why Diageo chose to buy the shares of Quangxing instead of directly buying the shares of Swellfun.

During China’s reform and opening up, the foreign capital has been playing an important role in promoting the development of China’s economy. However, due to the laggard laws and regulations for the foreign investment, there gradually came out the negative influence of foreigners’ controlling some industries. There are even worries about the threat of foreigners’ controlling industries to the national economic safety.

One Third under Control of Foreigners

Last November Beijing Jiaotong University issued the “2009 Report on China’s Industries under the Control of Foreign Investment” (hereafter the Report). According to the Report, the foreign investors have been amplifying their dominant place in China’s second industry in these ten years. The average domination level approaches one third, higher than the warning line of ordinary domination level. Above all, the domination level of foreign investment in light industry is beyond 37%.

This report is not a scary tale. The previous survey showed that 55% of China’s net export comes from foreign investment while the proportion of foreign investment in hi-tech products export is 87%. 80% of tyres in China are made by foreign-funded companies and the auto parts components made by the foreign-funded companies account for 73% of the whole industry in China. Moreover, 80% of cars sold in China have foreign brands and only 35% of panel TVs are made by Chinese companies. Some daily commodities, like beer and edible oil, are completely controlled by foreigners.

The Report said that there are more than 600,000 foreign-funded companies in China and nearly all the Top 500 companies have their branches of subsidiary companies in China. The foreign investment exerts the influences over the host county’s industrial safety through the controls of market, shares, brands and technologies. In China, foreign investments have a less dominant place in the industries of mining, electric power, gas and water production and supply. The manufacturing in China is very dependent on the foreign investment. In the recent 10 years, more than 30% of China’s manufacturing was controlled by foreigners. From 2005 to 2007 the domination level even reached more than 35%.

For example, the auto industry witnessed the foreign companies control 30% of the market since 1998 and the shareholding increased to 43.62% in 2006. The foreign companies’ control is getting stronger in both integrated cars and components. Particularly, 78.26% of the engine industry is under the control of foreign investment, which is a threat to the safety of China’s auto industry.

According to the data in 2008, the foreign investment controlled 12.9% of the steel market and 18.8% of petrochemical industry in China. The foreign investment also controlled 28% of the textile market which was featured with furious competition. 45% to 50% of China’s apparel market was then under the control of foreign captial. Furthermore, 37% of China’s light industry was seized by the foreign investors in the recent 10 years.

Notable is the fact that 80% of China’s electronic information technology was controlled by the foreign capital after the year of 2004. 36% of the patents in this industry were registered by foreigners. In addition, 70% of China’s hi-tech industry, which is the new key factor to economic development, is unfortunately controlled by the foreign investment.

In 2006, the report from the Development and Research Center of the State Council pointed out that the Top 5 companies in all the industries in China open to the foreigners are funded or held by foreign investment. The foreign investors have taken control of the majority assets of 21 of the 28 main industries in China.

Who Will Control the Finance?

According to the scholar Zhang Yijun and Xin Ping, the foreign investors earned at least 1 trillion yuan (USD 146.5 billion) from the Chinese commercial banks each year. In 2008, the four listed banks in China – China Transportation Bank, Bank of China, Industrial and Commercial Bank of China and China Construction Bank said in their financial reports that the four banks’ revenue in 2008 was 295.37 billion yuan (USD 43.27 billion), increasing by 30.5% compared to the year before.

However, neither the domestic investors, nor even the four banks themselves, could really enjoy the huge profits. Take China Construction Bank for example. In 2005 Bank of America spent 3 billion US dollars acquiring 8.19% of this Chinese bank’s shares. In 2008 it bought 6 billion shares of China Construction Bank, making it own 10.8% of the banks’ shares. That means 10% of the profits of China Bank of Construction are taken by Bank of America.

The foreign investors must be snickering at the low threshold the Chinese commercial banks set for introducing the strategic investors. Here comes an example of China Construction Bank again! Bank of America must be surprised, or overjoyed, to find that each share of the Chinese second largest bank cost only 0.94 HK dollars. Bank of China and Industrial and Commercial Bank of China also failed to escape the low share price when attracting foreign investors.

The foreign investors could get higher profits with lower cost. In addition to that, if they are trapped in trouble, they can arbitrage through selling these shares. When the financial crisis broke out and swept the world in the past two years, the Chinese banks became the ATMs for these foreign investors. At the beginning of 2009, Royal Bank of Scotland sold its 10.81 billion shares of Bank of China. Later, another three shareholders reduced their shareholdings of Bank of China. In addition to the China Construction Bank, the Chinese commercial banks are greeted by foreign investors’ massively selling their stocks.

The scholar Yu Yunhui warned in the book “Who Will Control China’s Finance” that the foreign investors take 8 steps in taking control of China’s different industries. The first step is getting to know the company, its industry and the market trend through buying a small portion of shares of a company and getting seats in the board of directors; the second step is to increase their shares of the company so that they could control it; the third step is to make use  of the pressure of foreign governments on RMB appreciation to increase the value of their RMB assets; the fourth step is featured with China’s worsening macroeconomic situation due to decreased export and depressed domestic consumption; then the foreign investors and their governments required the government of China to open capital account to realize the free exchange of RMB – this is Step Five. It is followed by Step Six, in which the foreign investors sell their shares of the Chinese companies for arbitrage and take a lot of assets away from China. This results in the depreciation of RMB and the financial crisis in China, which is the seventh step. Finally the foreign investors make use of the RMB depreciation to buy more RMB assets or larger shares to gain further control over China’s finance.

Daily Life Industry Monopolized

Apart from the industry and finance, the foreigners extended their control into the daily life industry. Goldman Sachs invested 30 million US dollars in Jiangsu Yurun Group, which is specialized in meat products, in 2005. In 2006 it spent 2.01 billion yuan (USD 294.4 million) taking the shareholding position of another meat producer Henan Shuanghui Holdings Co., Ltd. In 2007, Oriental Moore International Investment Management Corp. bought Henan Chuying Group specialized in livestock feeding. In 2008, Deutsche Bank spent 60 million dollars buying 30% shares of a pig farm in Shanghai.

Though only a few foreign investors get engaged in pig breeding, the huge profits of breeding pigs and the fast expansion of foreign investors in this industry still call for people’s attention.

Liang Haoyi, general manager of a Guangdong-based company, said that the foreigners’ engagement into pig breeding poses no threat to the whole industry; however, if no control is available, China’s pig feeding industry will share the fate of its bean industry, which is completely dominated by foreigners, in 10 or 20 years.

In 2004, the multinationals eyed on the Chinese beans and made use of futures to increase the price of domestic beans to the historical high 4.3 thousand yuan/ton (USD 629.9), forcing Chinese edible oil companies to buy 3 million tons of US beans. Then they lowered the price to 3.1 thousand yuan/ton (USD 454.1), resulting in the bankruptcy of half of Chinese edible oil companies. The foreign foodstuff giants took this opportunity and took over 60% of Chinese oil companies through massive acquisitions and mergers.

“The loss of pricing power is a tragedy, which sources from the control of foreigners over the transportation and processing of Chinese beans. But what’s an ever-bigger tragedy is the monopolization of foreign capital,” said Yin Chen, association professor of economics in Fudan University.

According to the report, 64 of the 97 large-sized bean processing enterprises in China are foreign funded or foreign invested. These 64 companies can process 50 million tons of beans each year, accounting for 85% of the whole industry’s processing capacity.

More Safety Measures to Take

During the National People’s Congress and China People’s Political Consultative Conference in 2006, Li Deshui, the head of National Bureau of Statistics at that time, said that the foreign investors stick to “three musts” strategy in the acquisitions and mergers in China, meaning that the companies they acquire must be No.1 in a certain industry; the revenue expectation from the deal must exceed 15% and they must have dominant control of the company. In order to implement their strategy, they even launch some hostile takeover for China’s top enterprises.

Li Deshui said that the rampant acquisitions and mergers of the foreign companies in China will annihilate the Chinese domestic brands and innovative abilities. The core part, key techniques and high added value of the Chinese leading enterprises will be completely controlled by multinationals. By then, China will be haunted by its lack of core techniques. The foreign investors may only place the production links with the lowest added value, the largest energy and resource consumption and the most serious pollution in China. Foreigners will receive most of the profits and assets originally gained by Chinese companies, making China a jobber in the international production distribution.

But Wang Zhile, head of Multinational Research Center, Ministry of Commerce, said that none of the 22 foreigners’ acquisitions that have been discussed a lot in the past years “really damaged the national safety” and none of them caused monopolization of an industry.

On March 5, Chinese Prime Minister Wen Jiabao stated in the government working report that China will continue to “optimize the structure of using foreign investment, encourage the foreigners to invest into high-end manufacturing, hi-tech industry, modern service, new energy and environment-protection industry” in this year. Meanwhile, China will speed up the construction and establishment of examination system for the safety of foreign acquisitions, said Wen.

It was known that the Ministry of Commerce and the State Council’s legislation office have already submitted the “Program of National Safety Examination System” to the State Council and it will come into use in this year.

By then a new department will be established. According to a source, this department will integrate the National Development and Reform Commission, Ministry of Industry and Information Technology, Ministry of Commerce, State Administration of Industry and Commerce and so on, as well as some important industrial associations. The head of the department may be a vice premier.

“In 2008 the Ministry of Commerce set up the anti-monopoly department. But this section is only responsible for the intensive reviews of the investors and is not engaged in the industrial safety or national safety, which will be tackled by this department,” said the aforementioned source.