Wall St. and Business Wednesdays: China's On The Playing Field by David A. Andelman

Look out below. Here comes China.

Before we can turn around, suddenly China, or at least Chinese companies--and is there a real difference?--may wind up owning some large swaths of corporate America. A Chinese company, Lenovo, bought IBM's entire PC business last month. Now, Chinese companies may be in the thick of the bidding for more big U.S. assets.

There's lots of talk that UNOCAL, the former Union Oil of California, may be in the cross-hairs of China National Offshore Oil Co., known as CNOOC, which could throw quite an expensive monkey-wrench in Chevron's bid for the company that seemed like a done deal.

Then there's your friendly Maytag repairman, who could soon find his paycheck signed by the folks from China's Qingdao Haier, which is joining Wall Street stalwarts Blackstone Group and Bain Capital to bid for the U.S. appliance-maker.

So what's wrong with that? On the face of it--nothing. After all, the Russians are talking about selling a chunk of Yukos' reserves to China.

Still, a host of issues complicates what should be an arrangement of the open borders, global investing that has so long been a hallmark of the growth of the American capitalist system. Yet, from the nature of the Chinese investments to the goal of the Chinese system, there are a number of priorities that the two nations may not share.

First, the most basic--what do the Chinese want and what are they prepared to pay?

What they seem to want is several things. First and foremost is natural resources--with oil at the top of the shopping list. UNOCAL controls more than 500 million barrels of oil in North America, has large natural gas reserves in Southeast Asia, and a minority stake in a big Azerbaijan oil field.

David Hale, publisher of the Hale China Report wrote last month in the Wall Street Journal that China is investing $1 billon in a nickel mine in Papua New Guinea, joined with BHP in buying into the Australian iron-ore industry, while a quarter of all China's oil needs come from Africa. Why shouldn't UNOCAL be next?

Another top priority is brand names. UNOCAL is a big U.S. brand. Maytag is even bigger--especially in the U.S. And IBM and Think-Pad are all but priceless names everywhere. Compare these with Haier, NCPC, FAW and Broad in appliances, pharmaceuticals, cars and air-conditioning respectively, and it's not hard to see why China's on the cusp of a shopping spree.

As for what they're prepared to pay, the answer is easy. Apparently, whatever it takes. After all, in China's case, the bidders are barely private companies. Certainly, there are private companies in China--even publicly-traded shareholder-owned companies. But in the final analysis, this is not a free capitalist market, not even as free or capitalist as Russia, where the state can step in and confiscate on the flimsiest of motives. Still, until they do so, their money comes from profits, shareholders and the debt markets.

Not so, in China where Chinese companies in any bid could go straight to the mother lode--the Chinese treasury--for more money to win any bid. Even if they are public, in many cases their financing comes at least in part from Chinese banks. And who owns those? In most cases, the state. How can even the wealthiest hedge fund or private equity fund investing state and local retirement dollars beat that? Let's see, the Salem, Ore. school district retirement funds versus the Beijing treasury? Who'd win that one?

Then there're jobs. Why would Qingdao Haier, a big name in appliances in the Orient, want with Maytag? They would, of course, like the Maytag brand name which could suddenly attach itself to Haier products made in its very low-labor cost Chinese factories. At some point down the pike, then, what's to keep more production migrating offshore to China? Or for that matter, design and engineering functions as well? While there may be American money in the Haier-Blackstone-Bain bid, the guys who know the appliance biz are from China.

Still, why not welcome foreign investment? Certainly that's the way General Electric, Ford Motor and General Motors became multinational behemoths. Free trade is the American way and so is unlimited cross-border investment. Money has no nationality. Cash is king.

All this is true as far as it goes. First, in these days of repeated tariff threats, there is the question of what happens if China truly begins to dump items in the U.S. at cutthroat prices. After all, their labor costs are a fraction of those in most Western nations. But how do you say "stop" to a country that owns most of the U.S. company that's party to the dumping dispute and that could cost American shareholders--the proverbial retired pensioner in Florida whose 401(k) risks cratering?

Of even potentially greater concern--what happens if China's economy itself craters? Where would China turn first? Possibly to the value in the companies they'd bought. But even more troubling, probably to the $230 billion in U.S. Treasury securities that the central bank has bought (as of April), according to U.S. government records--and that's nearly a third of its entire foreign exchange reserves. These purchases of treasurys has helped underwrite the U.S. trade deficit. Any hint that China was selling off any of those reserves could send shudders through every financial market in every time zone.

When it comes down to it, though, we may not have a choice. The Chinese are coming. And the reality is that we must learn somehow to accept this and figure our own way of making it work, as we have from the days of the earliest investors from England in the Massachusetts Bay Company--who were, of course, backed by the Royal treasury.

This article appears in Forbes Magazine.

David A. Andelman

Wednesday, June 22, 2005