Foreign businesses not as welcome as China changes strategy

By Elaine Kurtenbach
Associated Press
Saturday, September 16, 2006

http://biz.yahoo.com/ap/060916/china_foreign_investment.html?.v=1

SHANGHAI, China -- The going for foreign businesses in China, never easy, has gotten tougher as the government rethinks the "open door" policies that have made the country a magnet for foreign investment.

New rules forcing foreign news agencies to distribute news, photos and other services through the government's Xinhua New Agency are the most recent in a series of obstacles placed in the way of foreign businesses eager to invest in China. In recent months, Beijing has slapped limits on real estate investment and tightened controls on mergers and acquisitions -- moves that caught many foreign investors off-guard.

"In the old days, they wanted foreign capital. Now, there is a conservatism in the sense that some worry they are giving away too much in terms of state assets," says Bob Broadfoot of the Hong Kong-based Political and Economic Risk Consultancy.

Beijing has cited various motivations for the new measures, from the need to ensure competition to a desire to cool off too-hot segments of the juggernaut economy.

Overall, Chinese leaders insist there has been no reversal in the two-decade-old policy of encouraging foreign investment -- a strategy that has made China the world's favored destination for foreign direct investment for several years running, drawing $72.4 billion in foreign funds last year.

"The Chinese government will continue to adhere to the policy of opening ourselves to the outside world," Premier Wen Jiabao told British and Chinese business leaders during a visit to London this week.

Other factors too are creating a tougher business climate. The low wages that have made China a manufacturing powerhouse are beginning to rise, as are land and utility costs, potentially eating into profits.

But Beijing also is getting choosier. In recent months, the government has delayed closure of several major deals.

The private equity firm Carlyle Group LP has been waiting nearly a year for approval of a $375 million bid for an 85 percent stake in state-owned Xugong Group Construction Machinery Co.

Citigroup Inc. has been waiting for months to close a deal giving it a stake in troubled lender Guangdong Development Bank. Bank officials refused comment on reports this week that Citigroup had prevailed over rival buyers, winning a sharply scaled back 19.9 percent stake.

In both cases, nationalist sentiment over the sale of assets to foreigners was at work. After the Carlyle deal, the government later announced that big construction equipment makers must consult Beijing before selling stakes to foreign investors.

Germany's Schaeffler Group is still waiting approval of its 1.1 billion yuan ($138 million) bid for Luoyang Bearing Group, one of China's three biggest bearing producers.

Meanwhile, Beijing has announced a series of new regulations tightening restrictions on some kinds of foreign investment:

-- New merger and acquisition regulations, which took effect Sept. 8, require that the Ministry of Commerce approve all deals involving national or "economic security." Local companies must keep control of Chinese trademarks and brand names.

-- Rules announced in July bar foreigners from buying residential property that isn't for their own use and require government approval for transferring properties -- restrictions Beijing says target property speculators.

-- Proposed rules would limit growth of foreign retail chains such as Wal-Mart Stores Inc., which are becoming a huge presence in cities.

-- The government has announced limits on new foreign investments in cigarette and automobile manufacturing, citing the need to prevent gluts in both industries.

How the often vaguely worded rules will be applied is befuddling the foreign business community.

"We're concerned about some points, especially those that refer to 'economic security,'" said Bob Poole of the U.S.-China Business Council, an industry group of companies doing business in China.

In some cases, Chinese businesses appear to be winning government support for measures that shield them from foreign competition.

The new regulations announced Sunday that restrict foreign news agencies was a boost for the Xinhua News Agency, a staid purveyor of government propaganda that wants to transform itself into a global media titan. The rules grant Xinhua authority over foreign news agencies and the right to censor a wide range of news and information it deems unacceptable.

"They're using the excuse of information control to build a business monopoly," said James McGregor, chairman of JL McGregor & Co., a boutique investment and consultancy company.

Xinhua said in a statement that in its new role as regulator and distributor "it seeks no economic gains therefrom."

Despite such trends, foreign investment does not seem on the verge of dwindling. In a recent survey, the U.S.-China Business Council found that only 2 percent said they would be cutting back on investment next year.

Foreign companies are still bullish even in the real estate sector, where prices are beginning to plateau amid a multipronged crackdown on investment.

A survey of 180 executives by the Urban Land Institute, a non-profit, U.S.-based research group, found that a large share see China as a "must have," says Steve Blank, a senior researcher at the institute. "People say, 'Go get me a piece of China. I'm not interested in the details, just get me a piece.'"

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