Governments are right to worry about outsiders snapping up struggling companies amid the pandemic.
Globally, the economic devastation wrought by the pandemic is pushing even businesses with good ideas, smart technology or valuable resources closer to bankruptcy. You’d think that governments would welcome any investors willing to save them. Instead, that prospect is scaring more and more countries — because much of the cash could well come from China.
Worries about Chinese firms snatching up companies at distressed prices have prompted new regulations across the world, even if few of them clearly state who they’re targeting. Italy, the first European country ravaged by the coronavirus, massively extended the “golden power” regulations that allow it to prevent takeovers in strategic sectors; those now cover water, health care, media, power, finance and food production. Australia, France and Germany are similarly extending their powers of supervision and control. The European Commission has warned its member states “to be vigilant and use all tools available at Union and national level to avoid that the current crisis leads to a loss of critical assets and technology.”
Here in India, the government has gone to great lengths to avoid mentioning China specifically in its announcement of new investment-screening rules. The government will now scrutinize any investment from “an entity of a country which shares a land border with India,” the notification said. Somehow, I don’t think we’re worried about Nepalese takeovers of strategic assets. The Chinese embassy in Delhi, which can no doubt read a map, was not fooled, accusing the new policy of being “discriminatory” and “against the general trend of liberalization and facilitation of trade and investment.”
It’s not just the diplomats that are upset. So are the companies looking forward to a flood of Chinese money. India’s thriving startup sector was becoming addicted to Chinese cash; 18 of the 30 Indian unicorns have mainland investors, while companies such as Tencent Holdings Ltd. have poured about $4 billion into Indian tech. In Australia, smaller minerals companies, particularly in rare earths, are complaining of an “impossible level of uncertainty” thanks to the Foreign Investment Review Board’s new hawkishness about Chinese capital.
Some of these concerns are valid. A broad-brush approach risks cutting off access to important pools of offshore capital in places such as Hong Kong, for example. And, if bureaucracies work at their usual plodding pace, any eventual approvals may come too late, given the tight timetables for funding rounds that many start-ups face.
The other side of the problem should worry us even more, though: The restrictions may not be tight enough. In Australia, land purchases are subject to oversight – but not the water entitlements in the Murray-Darling basin being bought up by Chinese state-owned enterprises. Some rare-earths companies are just tweaking the size of their investments in order to avoid scrutiny.
In Europe, deal-making below a €100-million threshold doesn’t set off screening triggers. Yet, in countries such as Germany, small and medium enterprises might be world leaders in their technical niches. And, in the end, Europe is only as strong as any of its components. If the Czech government wants to let Beijing’s investment vehicle, CITIC Group Corp., buy the country’s largest – and most politically consequential – media house, then there’s not much Brussels can do at the moment.
That will need to change soon. New continent-wide screening legislation goes into force in October; Europe had better start behaving as if it already exists.
While it’s never great news when governments restrict market functioning, in some cases it’s inevitable. This is one of those times. No country wants to see a repeat of what happened after 2008, when state-backed money from other jurisdictions snapped up temporarily weakened assets.
The question is whether such intensified screening should last beyond the pandemic and, if so, in what form. At some point, countries will have to specify those sectors and deal sizes where they don’t want financial markets to work freely and immediately. Those restrictions should be as few as possible. And regulators and fund managers will have to work harder to define "clean" and "tainted" piles of finance, with different rules of the road for each.
Worries about China aren’t going to fade. Unchecked, state-directed action by Chinese companies could be as distortionary for the financial side of globalization as it was for the trade side. That would lead to further pressures to scale back globalization, which would be bad for everyone. If start-ups and smaller companies across the world want to secure their future, they should be helping to draft the rules needed to prevent that from happening.
This commentary originally appeared in Bloomberg.
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Mihir Swarup Sharma is the Director Centre for Economy and Growth Programme at the Observer Research Foundation. He was trained as an economist and political scientist ...
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