A series of recent foreign capital mergers and acquisitions (M&A) of Chinese businesses has raised concern about China's economic security. Will these actions damage China's national interests and is it necessary for China to set a bottom line in this field? Yang Fan, a professor at the China University of Political Science and Law, and He Maochun, Director of the Research Center of Economy and Diplomacy, Tsinghua University, were recently published in the Global Times, analyzing the impact of foreign M&A deals on China's economy from different perspectives. The following are excerpts from their commentaries:

Don't Sell Out to Foreign Capital

By YANG FAN

Since 2004, foreign M&As of Chinese businesses have really taken off and directly targeted flagship enterprises in relevant industries.

The criteria for an industry's core competitiveness and industrial security are actually composed of a series of intellectual properties held by flagship enterprises. The M&As of flagship enterprises and famous brands will help foreign businesses to further dominate China's technology criteria in a certain industry and then gain industry-wide control, as changes in technology criteria will lead to shifts in technologies and business approaches in all involved enterprises. The problem is therefore who should come to integrate current enterprises and who should have dominance over the future development of a certain industry against the backdrop of this new scientific and technological revolution. Through ill-intentioned M&As, foreign businesses can contribute to the demise of famous Chinese brands, control Chinese technicians and carve up the Chinese market. There is no lack of such precedents and this is an often-used strategy to destroy opponents in the process of market competition.

More importantly, flagship enterprises in such pillar industries as equipment manufacturing, which is related to defense production, must not be controlled by foreign capital. If the government fails to implement effective regulatory measures, China's future market and technologies will be brought under the control of top transnational companies. This will have severe consequences. Given this prospect, some Chinese are still willing to make sacrifices. They believe that the Chinese are unable to manage the situation by themselves, and so, in order that China can get in line with globalization and achieve the big objective of reform and opening up, and in order to update China's outdated systems, the loss of national interests can be ignored. However, this mindset may eventually damage China's strategic industries and indigenous enterprises.

Amid the prevalence of neo-liberalist economics in recent years, there is a trend to emphasize too much on gross domestic product (GDP) and play down gross national product (GNP). GDP is a production concept, which pays no attention to which part of the world the GDP contributors come from. It is believed that as long as the business is registered in China, admitted into China's GDP and pays taxes to the Chinese Government, it is a Chinese enterprise, and here it's unnecessary to distinguish whether the investor and operator are from China or a foreign economy, as nowadays all the involved parties' interests are combined. However, profit distribution is a hard index and nationality can't be neglected when the people who share the profit are considered. China's GDP outweighs its GNP by tens of billions of U.S. dollars, and this gap is widening, which shows that China produces a lot, has a high employment rate, and suffers from serious pollution, but the Chinese can only share a small portion of the profits.

M&As by foreign firms may be permitted in areas that do not affect national security, but anti-monopoly laws must be obeyed. Why is it so easy for foreign businesses to develop into a monopoly? First, they have international famous brands; second, they are supported by some Chinese interest groups and local governments. It is stipulated in many countries that government procurement must be preserved for domestic products, but China does not have such stipulations.

In 2005, China approved the establishment of 1,027 foreign-funded retail enterprises. At present, 40 of the world's 50 top retailers have chain stores in China. Wal-Mart of the United States, Carrefour of France, Germany's Metro Co., and Ito-Yokado of Japan have all developed into large-scale operations, with large stores, shopping centers, big marts, bargain shops and specialty stores and now they are moving toward the wholesale sector. Among the officially recognized top 100 retailers in China in 2005 were 18 foreign businesses, while in 2004 there were 12. Their total assets amounted to 150 billion yuan ($19.6 billion). As a matter of fact, although it does not need high technologies, the retail industry can bring large profits, so if this industry is open to foreign M&As, the bankruptcy of the indigenous retail industry is highly possible.

Nowadays, some Chinese have blind faith in foreign products, and this helps with foreign firm acquisitions of Chinese businesses and occupation of the Chinese market. Against this complicated background, the state must take well-devised countermeasures. For instance, in some special areas, economic security and the development of strategic industries should be the guiding principle and the state should impose certain limitations on foreign M&As. In the developed world, strict restrictions are imposed on M&As. This is the demand of economic security and anti-monopoly and is thus called "safe harbor policy." In some heated competition areas in particular, conventional regulatory rules and anti-monopoly policies are not enough. If several transnational companies try to divide up the Chinese market, this is actually not monopoly in the legal sense, as it's improper to treat all the foreign companies as an entity, because even these companies are also competing with each other. Therefore, such concepts as "national economy" and "national famous brands" must be stressed and the state needs to further support development in these areas. Otherwise, in the future, China's huge market will be divided by transnational companies and a large amount of profits will flow out of China. If that happens, transnational companies will dominate the development of industries and technologies in China and reorganize China's industries on this basis, which will result in the downfall of local businesses. Therefore, it's time to halt the large-scale M&As of Chinese enterprises by foreign companies, which is mainly conducted in the interests of certain departments, local governments and foreign-funded firms. Instead, M&A deals should be done in China's national and long-term interests.

Opening up Ensures Economic Security

By HE MAOCHUN

Domestically, to open the M&A market requires the courage that we saw in the opening of the Greenfield investment market in the early years of reform and opening up. According to the World Investment Report 2006 issued by the United Nations Conference on Trade and Development, the inflows of foreign direct investment (FDI) around the world have maintained a strong growth momentum for two years and investment by multinationals is speeding up too. Contrary to this overall tendency, however, since its accession to the WTO, China has seen a slow growth of FDI. In 2007, China repealed some preferential tax treatments toward foreign-funded companies, while our neighboring countries, some Latin American countries, as well as European and North American developed countries began to increase tax breaks to foreign companies. This contended for international capital with China and hindered China's absorption of FDI. Last year saw 41,485 foreign-funded enterprises set up in China, down 5.76 percent year on year, and paid-in foreign investment was $69.47 billion, a decrease of 4.06 percent.

China is still a big developing country in need of a large amount of foreign capital. Without foreign capital, it's difficult to achieve the goal of maintaining an average annual growth of 7.18 percent and quadrupling the national GDP by 2020. In the past 29 years, foreign investment's annual average contribution to China's GDP growth stood at 1.4 percentage points and it made up around 12 percent of the country's whole fixed assets investment. Foreign-funded enterprises have made an even bigger contribution to general trade and processing trade. More importantly, apart from offering money, foreign capital also helps China with economic restructuring and corporate system reform.

M&A represents a market-oriented relocation of natural and human resources and capital and also promotes rational competition in line with relevant rules. The decline of Greenfield investment is undoubtedly the demand of investment structure adjustment and the maintenance of sustainable development. In order to largely absorb foreign capital, China has to depend on M&As.

Some people are concerned that foreign capital M&As are threatening China's economic security, but the most striking insecurity is the rejection to open to the outside. One of the criteria to judge economic security is economic competitiveness and corporate competitiveness. The development process of Western industrialized countries and East Asian Tigers, particularly the global M&A wave in recent years, proves that this is an important way for businesses to enhance their competitiveness. To close the M&A market will only impair Chinese enterprises' competitiveness and lead to passive acquisition of Chinese businesses by foreign companies. In 2005, among the 500 largest companies listed by Fortune magazine, 19 were from the Chinese mainland, ranking China the sixth in terms of company numbers on the list. In 1996, China had only three enterprises on this list. Without foreign competition, it would have been impossible for Chinese enterprises to increase their competitiveness to such a great extent within such a short time. Quite a few Chinese enterprises have grown up in the cooperation with transnational companies. The earlier an industry began to open to foreign capital, the stronger competitiveness it has.

It's unwise to argue that foreign capital is threatening China's national economic security just because several Chinese enterprises were hurt by competition, and we must beware that some groups may seek to protect their individual interests in the name of safeguarding national interests.

Of course, it's undeniable that foreign capital M&As of Chinese businesses will have negative impacts, such as the creation of monopolies, environmental deterioration, unfair competition, and losses of state-owned assets. These problems are not excuses for us to reject foreign M&As, but we should examine our own problems. For example, we need to improve the laws and regulations on the management of foreign firms.

As for foreign capital M&As, on one hand, it should be encouraged; on the other hand, risk management mechanisms are also necessary. Every country has their own way of preventing risks while making use of international acquisitions. Openness is not without restrictions and thus the liberalization of investment and trade needs to be standardized.

It's also important to open to domestic capital while opening to foreign capital. China has foreign exchange reserves topping $1.2 trillion and its bank deposits in local currency amount to 13 trillion yuan. Thus, local capital needs to be encouraged to participate in the M&A process. To balance openness and security as well as a good credit reputation and protection of domestic businesses in the process of M&A requires the efforts of the whole society and the participation of both the government and the civilian community.

Foreign capital M&As also present another challenge, that is, the transition of concept. We should have confidence in the Chinese Government's ability to regulate foreign capital and we should watch the process of China's integration into the world economy by regarding ourselves as a strong partner. A country's competitiveness is actually its ability to integrate and make use of international capital, technologies and other resources, and China has already made great progress in this regard.