By LARRYROMANOFF – September 24, 2020
In joining the WTO, China made substantial
commitments to relax the restrictions on foreign investment, on ownership of
assets and the transfer of technology. Coupled with increasingly open capital
markets, these acquisitions created convenient conditions for the expansion of
foreign control of many economic sectors, with takeovers increasing almost
exponentially, led by US and European multinationals. It was originally hoped
that the large influx of foreign corporations would inject vitality into the
development of China's economy, and it may have done so, but at the same time,
has also brought serious negative effects. In particular, foreign Joint
Ventures evolved from initial cooperative efforts to a situation where an
increasing number of industries and industry segments were dominated by a few
foreign MNCs, forming virtual monopolies in some cases.
These
foreign-funded enterprises now number about 450,000, and have grown at a
double-digit rate, often controlling a market share of 30% or more,
accounting for more than half of China's total exports and 20% of its tax
revenue. In some developed regions, these foreign enterprises once accounted
for more than 40% of all assets, 35% of all added value creation, and a large
number of employees. The number of foreign takeovers and acquisitions in China
has been growing at a rate of 50% or 60% in the recent few years. In 2010,
China recorded 1,800 mergers and acquisitions with a value of $82 billion.
Among other effects, these developments greatly increased the cost of
commercial development land in smaller centers like Suzhou and Kunshan, and
other red lights were flashing as well. And according to a World Bank study of some 12,500 foreign firms in more
than 100 Chinese cities, their return on investment was well over 20% - much
higher than that of domestic firms - but with a much lower average tax burden.
In a real sense, these firms were being paid to take over the country's
commerce.
Unfortunately for China, the adage,
"most pretty, first married" applies fully here, in that the most
attractive domestic firms are invariably the prime targets of so-called
"foreign investment", presenting a serious threat to China's economic
control and strategic industries. Initially,
most Chinese companies failed to anticipate the brutal and predatory nature of
US multinationals, and often unwittingly placed themselves in a position where
their brands disappeared at an alarming rate after entering a Joint Venture.
A lack of uniform standards and a firm hand on these multinationals coupled
with the expansion desires of local officials, led to the sale of many domestic
enterprises at too low a price, or the sacrificing of long-term benefits for
short-term gain. In any case, this all began to lead to the loss of prime
assets, foreign dominance, and a constant creeping erosion of domestic economic
control.
The fact is that the foreign joint venture
partners - contrary to their contractual undertakings with the government in
establishing these JVs - are unwilling to develop and promote domestic brands
for fear of losing captive technology to latent competitors. The usual result
is the transfer of bits of useless and badly-outdated technology and the launch
of a few low-end models instead of genuine cooperation in R&D and marketing.
We can argue their reluctance to nourish potential competitors is
understandable, but that commitment to share was the basis of the very approval
of those same JVs. The time to have expressed that reluctance was before
entering into those joint ventures which, it must be pointed out, the Chinese
government approached in good faith. The result is very large-scale auto
manufacturing that is almost totally dependent on foreign firms with no benefit
to the domestic industry. Once again the foreign firms have reneged on their
commitments and are in fact conspiring through their actions to remove domestic
brands from the market. This determination is not casual. As I noted elsewhere,
GM took a heavy financial bath by pushing Saab auto into bankruptcy primarily
if not solely to prevent a Chinese firm from obtaining some useful auto
technology. They do not care about developing local talent or management
expertise, but instead centralise everything to maintain control. Local JVs in
China will most often learn little, the JV will have no useful technology
transfer or osmosis, and only the foreign partner will benefit.
This
circumstance of excessive and focused foreign investment inevitably leads to
foreign control of a country's economy,
forming a direct threat to the development of related domestic industries and
to the basic economic security of the nation. In a developing country like
China, a high level of foreign investment results in these firms controlling
the rate of expansion of various domestic market segments, curbing competition from domestic firms and limiting their rate of
growth and survivability. The percentage by which foreign firms dominate a
market is of great importance to a developing nation, and most multinationals,
especially American ones, have market domination as a first purpose. If this percentage domination reaches 30%
of a general industry or 50% in a specific industry, the domestic situation
becomes dangerous. At this level, it can become almost impossible for domestic
firms to thrive or even compete effectively. A significant number of
foreign multinationals have each purchased many domestic firms, with the result
that China has in a sense "sold out" much of an industry to
foreigners, creating domestic difficulties almost impossible to repair.
Furthermore, this investment-led development
forces a synchronous expansion in Chinese industry, creating a situation where
Chinese firms are increasingly only a cheap labor component of a foreign-owned
supply chain. China in effect would have become simply the blue collar workers
for the foreign firms who controlled the JVs, owned the technology and
know-how, controlled the markets, and expatriated their great majority share of
the profits. As one example, in a recent
year, China exported more than 5 billion pairs of shoes, reaping less than 20%
of the total profits, while the remaining 80% went to the foreign brands
and their distribution channels. In this circumstance, China's low-cost manufacturing creates low prices of goods in foreign
markets and rising prices at home for foreign goods but, as foreign
multinationals increasingly dominate local markets, the terms of trade worsen
for China.
Since
dominant foreign firms force domestic wages to minimum levels, China's share of
value-added production actually decreases with these JVs.
This predatory, and skewed, division of labor would result in China remaining a
poor country forever. This is one reason that China's wage growth rate was
initially low, at a small percentage of that in countries like the US. The original development model that
permitted the disappearance of China's venerable companies and established
domestic brands, was one that also had a negative effect on the pattern of
social income distribution. It is clear it was not China's goal to make the
Chinese the workers of the world for rich Western multinationals, but rather
the objective was to build a society where it is the Chinese who are well-off,
rather than a few foreigners.
For
generations, the huge US multinational corporations, with the full backing of
the State Department, used their size and power as well as times of a strong
currency to buy up large sectors of many countries.
When the US had cash, its corporations went around the world buying up
everything attractive in sight, encouraged by the bullying of their government
who would bludgeon to death any nation that objected. Canada awoke one morning in the 1950s to discover that US companies
owned almost the entire country. Almost all mining and manufacturing,
lumber and paper, were owned or controlled by US firms. Most products on the
shelves may have been made in Canada, but were manufactured by domestic
subsidiaries of American firms. Canada's entire auto industry consisted of
American manufacturers. Most significant sectors of the Canadian oil industry
were American-controlled. Most of the wholesale trade was American, as were
much of the transportation and distribution networks. Almost every program on
Canadian TV was American. Almost every book used in Canada's elementary and
high schools, and universities, was written and published in the US. It took
Canada 50 years to buy itself back. It is always instructive to see how
negatively the US reacts to the reverse process. When Japan began buying US
assets in the 1980s, there was hell to pay. Rhetoric in the media was so strong
it seemed another war was imminent. Foreign companies wanting to expand in the
US - or the Right-Wing world, which includes Canada, Australia and the UK, will
have the process effectively shut down. For Japan, it was 'because you're
yellow'; for China, it's 'because you're communist'. And often veiled in a
cloak of "national security". The Economist magazine had an article
claiming that China's state-owned firms were on a shopping spree, and telling
us:
"There is, understandably, rising
opposition to this trend. The notion that capitalists should allow communists
to buy their companies is . . . taking economic liberalism to an absurd
extreme."
We might as well ask if Protestants should be
able to buy assets in a Catholic country or Arabs in a Jewish one, or maybe
blacks in a white one. We are not so effective as we imagine, at separating
racism and bigotry from practical commercial concerns. This is much more about Imperial Prerogative than about security or
form of government. I can buy you because I'm white and therefore superior to
you, and because it's my right granted to me by my god. It is written in
the Western Bible of Capitalism that commerce is God and US multinationals are
His Archangels. Certainly the analogy is fitting, since the US approaches this
with a truly religious fervor. The US Capitalist model is founded on a
Judeo-Christian white supremacy that is absolutely racist, looking on much of
the world with open contempt. "We can buy you, but you can't buy us."
It is due to this theological Capitalist model that Americans have their
overwhelming sense of entitlement to colonising the world, and react so
ferociously to the opposite taking place. But this is all nonsense and American
jingoism. There is no practical or philosophical principle to support the
thesis that American companies have a God-given right to enter any nation
without restriction and purchase anything they want.
The good ship US is nowhere near as open and
dedicated to market freedoms as popular American jingoism suggests. This theory
applies only when the US is doing the buying and it is your ship that is
sinking. The driving factor is global corporate dominance. The agenda shared by all sections of the US government, the
multinational corporations, the European bankers, and the media, is a
determination to dominate the world's commerce, nation by nation and market by
market. This US drive for supremacy is not only military, but political,
economic and commercial. American companies seek domination because the US
capitalist model is a viciously predatory one that accepts no surrenders and
takes no prisoners. Wherever possible, it eliminates all competition and dominates
every market, striving for a market share of 100%, and will stop at nothing
to keep competitors in the dark and out of the market. Of course, the US reacts
violently to any foreign nation exercising such a predatory agenda on its soil.
Any approach by a foreign company to take over a significant American business
is seen not only as a potential economic loss, but as a political, ideological,
and possibly even a military, challenge. The US government will assist American
corporations in obtaining unfettered freedom to purchase any and all viable
assets in other countries, and will support this with the military, if
necessary. In fact, this is now, and has
always been, one of the main reasons for the existence of the US military - to
use threats of force to assist the US commercial domination of industry sectors
around the globe. More than 100 years ago, the US military hijacked the Kingdom
of Hawaii so Senator Bob Dole's relatives could obtain control of the
plantations.
Upon
entering a country, US firms will typically overwhelm a market segment with
advertising to weaken and threaten domestic firms. Then, with their huge
reserves of available capital and financing, they will seek out and purchase
the major players in each industry segment, and close them down to kill the
brands. In the newly-created void, consumers are
faced with American or nothing, other choices having been obliterated.
Virtually all of the famous American consumer-goods companies operate in this
predatory manner: P&G, Pepsi, Coca-Cola are some of the worst. The list of
venerable foreign brands that have disappeared from various markets due to this
predatory mercantilism would shock most Americans who are isolated by a blanket
of media silence and never learn the truth about their own nation's behavior. Any action by a domestic government to
prevent such destruction of their renowned brands is loudly condemned by the
Americans, who will exert enormous political and economic pressure on a weaker
nation to conform to this American model. The US government, in cooperation
with the State Department and even the CIA, with all its so-called NGOs, will
combine their efforts to inflict this same agenda on any nation weak enough to
be overcome. Very often, the US government will arrange for its industry groups
to file actionable protests against these nations or take charges to the WTO,
in a bid to exert yet more pressure to open wider the doors for its
multinationals to plunder more easily. This
is the American definition of "a level playing field". Some
European industry groups like Nestle, Unilever and Danone have learned from the
Americans and copied their model quite effectively.
These practices were being extolled by
foreign governments, banks, and experts in so-called "think tanks",
preaching the gospel of China's corporate landscape reform by imparting foreign
management practices and supposedly transferring advanced technology. However,
they were simultaneously - and knowingly - working to channel many industries
into foreign hands to the long-term detriment of China as a whole. These
threats occurred not only in important strategic industries, but in home
appliances, food and beverage industries, light manufacturing, farm machinery,
clothing, and so on. While China was being praised for following the recipe
advocated by mainstream Western (developed-country) economics, the inherent
fallacies in the wave of foreign investment through outright purchase or M
& A were being exposed. If this process had been permitted to continue, one
day all leading companies in all industries in China would have been
foreign-owned, and the Chinese people would have had no remaining capacity or
influence on their own industries and markets. At that point, a nation would lose control of the foundations of its
own economic policies, including the regulation of everything from monopolies
to price regulation and its own technological progress. As well, the nation
would have slowly bled to death from the increasing outflow of profits to these
foreign multinationals. It is to China's credit that the government awoke
early to the dangers of the predatory form of Western capitalism, in time to
retain control of the nation's economy, industry and resources, and to protect
China's national interest. During this development, the US government and its
multinationals were whining and exerting every manner of political pressure on
China's government to further "open the doors", to "embrace the
free market" and give the US "a level playing field". It is
worth noting that the US would never permit such industry domination on its own
soil by any foreign companies, most especially those from China. As always,
American hypocrisy at its finest.
The US media also cooperate fully by
demonising such a nation to their public, with accusations of lacking a
"rule of law" or of succumbing to "economic nationalism" or
"not playing by the rules". News firms like the Financial Times
solemnly warn us that today "Investors must continue lobbying the Chinese
government to resist the temptation of economic nationalism." The FT also
advises us that "If a potential transaction risks provoking
"nationalistic" objections, investors will need (to be clever enough)
to couch the deal "in the language of mutual benefit"." It is
interesting to read the Western spin on these takeovers and acquisitions in
China, the US government and many media columnists attributing any difficulty
to China's "economic nationalism", casting an unfavorable moral cloud
on China's decisions. But it was the US in the case of Japan a few decades ago,
and in the case of China today, that American economic nationalism was the
over-riding force in acquisition rulings. When Japanese firms began buying up
American icons in the 1980s, the US media were almost having seizures about the
threat from this "Yellow Peril". And today economic nationalism is
prevalent in US protectionism. Acquisition attempts by Chinese companies in the
US have not only encountered immense difficulties but often slanderous personal
attacks, entirely for political reasons. CNOOC's $18.5 billion bid for Unocal,
a US energy firm whose assets were mostly in Asia, was denied on the grounds of
US national security and energy security. In fact, it was the Asian assets that
were of most interest to China, and the US refusal was clearly intended to
inhibit China's attempts to secure adequate energy sources. Huawei and ZTE have
been shut out of American markets and blacklisted from purchases because of
supposed threats to US "national security". Haier's proposed acquisition
of Maytag, a major US household appliance manufacturer, foundered due to an
astonishing amount of patriotic nationalism, where another US company overpaid
by about 20% just to keep the company out of Chinese hands.
As noted above, foreign Joint Ventures in China,
mostly involving American firms, but including some European, progressed to the
point where they totaled almost 450,000, often controlling 30% or more of an
industry and, in some regions, accounted for 40% of all assets and 50% of all
exports. The number of foreign takeovers and acquisitions in China has been
growing at a rate of 50% or 60% in recent years and, in one year alone, 2010,
China recorded almost 2,000 such mergers with a value of almost $100 billion.
Yet Chinese firms today own just 6% of global investment, while at their peak,
Britain and America owned more than 50%. Out of 1000 top global companies
today, more than 600 are American. How many US companies are in China? Hundreds
of thousands. How many Chinese companies are in the US? Maybe five. If you
research the numbers, then you will know who is buying up whom. The difference
between the USA and China owning a significant part of the worlds assets is a
very simple one: China deserves it. The USA has 300 million people, China has
1400 million people. There is nothing wrong or sinister in China's corporations
owning five times as many assets as those of the US.
Yet in the light of this, we are constantly
faced with the astonishing ignorance of Americans, in terms of anything
occurring outside their borders, especially involving the actions of their
government and corporations. Consider this comment from an American, posted in
response to a typical article in the Wall Street Journal: "Since China
doesn't allow foreign companies to invest in corporate assets in China, the US
shouldn't allow China to buy corporate assets in the US." This American,
whose only source of information is the pathologically-slanted US media, is
apparently totally unaware of the extent to which US companies have completed
asset acquisitions in China. And that is to the credit of the media and their
columnists, on the same page as the US State Department and the American MNCs,
preaching competition, free trade and open markets while demonising China and
deceiving the American public.
On this topic, June 21, 2016, we had an
article in the Wall Street Journal, the mouthpiece of the State Department, by
Andrew Browne, denigrating China for a handful of attempted corporate
investments in Germany, and further suggesting the entire world is preparing
"a protectionist backlash" against this monster, the backlash
"fueled by the rise of populist politics". According to Browne, China
is "snapping up Western technology and brands" at an alarming pace,
with "trillions of dollars" to blow around. Bu Browne tells us
"China doesn't reciprocate. The world's second-largest economy comes dead
last in a list of countries ranked according to their openness to foreign
investment ..." Well, that's a surprise, given that China had, at last count,
nearly 450,000 registered foreign businesses, a very large portion of which
were American. Browne continues that China "is sliding further
backward", "squeezing out", "hobbling", and otherwise
hindering the poor American companies desperately wanting to invest in China
but who cannot. And even worse, China is "maintaining strict limits"
on the chaste and maidenly American banks who, even more desperately, want to
introduce China to a 2008 financial meltdown ["an area in which they excel"]
- but one with "Chinese characteristics". Browne particularly laments
that China's defense industry "is completely off-limits" to American
firms, apparently unable to imagine why. As a contrast, he lists India as a
shining example of a nation that "will allow foreign investors [i.e.
American vulture banks] to buy 100% of defense ventures', neglecting to mention
that his own country (either the USA or Israel) would start a third world war
before permitting Russia or China, or indeed anyone from anywhere, to purchase
100% of KFC, much less of a defense contractor. But Browne is nevertheless full
of praise for India, being "now more open than any other country in the
world."
Interestingly, in his tirade against China's
"snapping up" everything in the world, Browne provides no examples of
these dearly-departed snapped-up, most especially no examples of any such
American firms slain in sacrifice. Of course, that's because he has no examples
to offer, but let's not spoil the man's story. Browne does offer the obligatory
and often-mentioned case of Shuanghui buying the American meat firm Smithfield,
as an example of "China buying America", but neglects to mention that
Shuanghui is not in any sense a "Chinese" company, being listed in
Hong Kong and primarily owned by US vulture funds. The Shuanghui-Smithfield
deal was in fact a reverse takeover, giving the US firm Smithfield a position
of dominant control in an important sector of China's food supply. And, on the
subject of food, Browne informs us that China "jealously guards" its
food industry from foreign takeovers, apparently ignorant of the hundreds of
Chinese food companies purchased by American firms, or that Pepsi vows to
become "the largest food company in China". Browne then includes the
also obligatory accusation of China's "rampant theft of intellectual
property", apropos of nothing at all and, as always, with a total absence
of evidence, a slanderous accusation apparently equating to irrefutable
evidence. I've dwelt on this because Browne's article is typical of the daily
flood of such articles in the Wall Street Journal, all viciously slanderous,
heavily biased, intentionally misleading and always containing numerous
fabricated facts and false statements that could be sensibly categorised only
as outright lies. Browne fits the mold perfectly, so much so that I use his
articles in my EMBA classes as case studies in unethical journalism as well as
in the propaganda component of American imperialism. But this article is only
one of thousands, and from only one of dozens of US media outlets, all directed
in a broad sense and all forming part of the US' intense pressure on China to
"rebalance" its economy. I will deal with this topic in more depth
later, but a few observations are in order here.
The US wants China to reduce its
infrastructure development and cut back on manufacturing and turn to services,
on the claim this is more 'sustainable' and will somehow save the world.
Infrastructure is of course critical to a nation's development and provides the
momentum for it. If Wuhan to Chongqing takes 13 hours, there won't be much
trade, but if a new high-speed rail line cuts that trip to three hours
everybody will be travelling and the momentum created by that infrastructure
will take on a life of its own. But for now let's concentrate on the commercial
sector. For manufacturing, the US is demanding China reduce capacity by 30% or
more, resulting in the output of most major industries falling by that amount,
and with many smaller industries disappearing altogether. The Americans are not
completely clear on how this would help China, but let's ignore them for the
moment. The important fact is that this enormous manufacturing cutback will be
borne by Chinese manufacturers in China. But that raises a question: will the
American manufacturers in China also rebalance? Will they also reduce their
capacities by 30%? Of course not. They will be expanding by 30% to 50% in their
determination to 'dominate China's markets'. And that means the US will
eventually be manufacturing 50% or even 80% of all the goods in China - and 50%
or more of all the goods in the world, as it once did. The only difference will
be that much of that manufacturing will be done in other countries, but the net
result will be the same.
And
if American firms control 50% or more of China's manufacturing, they will
control the country's entire economy. If they control manufacturing, they will
control the choice of products being made, and their quality. They will control
all the cultural values contained in all those products, values which will be
entirely American. If they control that extent of manufacturing, they will also
control virtually all R&D, and will have the
power to decide which products reach the market and which are withheld. They
will be able to prevent new entrants to every market. If the Americans control
manufacturing, they will also control
wage levels and benefits and, eventually, labor laws. They will also control
price levels, that degree of market control being sufficient to set price
levels for virtually all products. Long
before this finally played out, China would have lost control of its economy
and become a US economic colony. And that is the intent, the Americans
merely being a conduit for the transmission of this philosophy, obtaining and
following the orders issued from their masters, the European banking families
that control them. But let's not lose the main point: Browne's article and the
entire American bullying apparatus are directed entirely toward attempts to
force China to willingly abandon the precise strategy that produced its
astonishing development, abandon hope for any future progress, and turn all its
manufacturing capacity over to the Americans so as to become a US colony.
Nestlé
made a $12 billion purchase of Pfizer Inc.’s baby-food business, and has also
purchased a 60% stake in Chinese candy maker Hsu Fu Chi for about $1.7 billion,
in one of the largest foreign takeovers of a Chinese company. Yum! purchased China's Little Sheep
hotpot chain, with 470 restaurants in the Chinese mainland. AB InBev is on the shortlist to buy
China's Kingway Brewery, valued at $700 million. French giant LVMH has acquired a stake in mainland
fashion maker Ochirly. AstraZeneca has purchased Guangdong BeiKang Pharmaceutical.
Concord Medical Services (Carlyle Group)
has acquired a 52% stake in Chang'an Hospital, a 1,000-bed facility in Shaanxi
Province. US-based Medtronic, the
company involved in a US scandal with patients dying from defective heart
pacemakers, has purchased Chinese medical device maker China Kanghui Holdings
for $816 million in cash. Boots,
Europe's biggest pharmacy chain, purchased a stake in China's Nanjing
Pharmaceutical. Cardinal Health, the
second largest drug distributor in the US, acquired Zhejiang Dasheng Medic,
China's second largest company in terms of hospital sales. Not all applications
for takeovers of Chinese firms are approved. Coca-Cola's proposed takeover of Huiyuan Juice was refused because
it would have given the US company dominant control of China's juice market, in
fact about 80% of the total market for those goods, and not the 20% the US
media stated.
We
also have a distressing number of acquisitions proposed by predatory American
banks and hedge funds, firms that should rationally be prohibited from this
kind of commerce since they have neither knowledge of,
nor long-term interest in, these industries, and this kind of 'investment' is
always a one-way street. Typically, they financialise a company and then
destroy it, forcing quality degradation, cutting staff and expenses to the
bone, then extracting an enormous profit from an IPO, after which the shrunken
skeleton often struggles to survive. These US financial institutions are
heavily supported by political and media pressure, but should be banned totally
from all commercial categories of what is called 'foreign investment'. Warburg Pincus bought a share of
Huiyuan; Goldman Sachs tried to
purchase Shineway, China's largest meat producer, after already purchasing
Shuanghui and orchestrating its takeover by Smithfields. The Carlyle Group tried to purchase Xuzhou, one of China's largest
construction machinery companies. What
does Goldman Sachs know about operating a meat company, or Carlyle about
construction machinery? Clearly, they don't intend to own and operate, but to
financialise and extract cash; nothing else would attract them. The US
media proudly boast of the many mergers and acquisitions initiated by these
vultures but never provide the public with details of the destruction and
eventual demise of many of the victims.
Just as no one should be able to buy and sell
foreign currencies except for direct use in international trade, so likewise
these so-called financial groups, criminal vultures and scavengers all, should
be prohibited from purchasing stakes in foreign companies except as silent
shareholders through a stock exchange.
These
American banks, hedge funds and other so-called financial groups have left a
trail of hundreds of corpses around the world,
most often in undeveloped countries from which the news never escapes into the
West, and this trail absolutely includes not only corporations but national
governments as well. In 1997, Bankers like Goldman Sachs, people like George
Soros, and stealthy predators like the US FED were happy to pump billions into
Asian financial markets, creating bubbles while destroying currencies, then
absconding with a massive profit and leaving behind devastated national
economies. Americans blithely refer to "The Asian Financial Crisis",
apparently ignorant of the fact that their own institutions and speculators
caused it solely from greed, while bankrupting Thailand in the process.
*
Larry Romanoff is
a retired management consultant and businessman. He has held senior executive
positions in international consulting firms, and owned an international
import-export business. He has been a visiting professor at Shanghai's Fudan
University, presenting case studies in international affairs to senior EMBA
classes. Mr. Romanoff lives in Shanghai and is currently writing a series of
ten books generally related to China and the West. He can be contacted
at: 2186604556@qq.com.
Larry Romanoff is
one of the contributing authors to Cynthia McKinney's new COVID-19
anthology ''When China Sneezes''.
Copyright © Larry
Romanoff, Moon of Shanghai,
2020
