Chinese Protectionism vs. Political Pressure

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Mar. 31 – One of the debates doing the rounds following the fallout of the Coke-Haiyuan deal is China’s attitude towards foreign investment. There have been cries of protectionism and warnings on the perils of doing business in China, and in certain quarters, an absolute belief that China is “anti-foreign takeover” doing the rounds.

One needs to take a step back and assess the situation properly. Fingers pointed to China’s Ministry of Commerce (MOC) for invoking a clause in the M&A deal that suggests protectionism is the underlying issue here would do well to consider that for such a situation to exist, a specific government policy must be in place to support it. While no government would admit to actively pursuing such a course, one can however look at trends.

The reality is that China has been the world’s largest recipient of FDI for the past 13 years. This wouldn’t be so if China was in fact pursuing a protectionist policy. Indeed, in the retail sector, foreign investors such as WalMart are expanding at a rapid pace. Citing protectionism must therefore be approached with skepticism.

Why then, did the MOC reject the deal on the basis that a Chinese brand name was at stake? It too, makes no apparent sense, especially since the company is listed in Hong Kong and not mainland China. Haiyuan is not, de facto, a Chinese brand. It is a internationally traded Hong Kong brand. Since the excuse given seems suspiciously ill-defined the answer must lie elsewhere.

Political pressure is different from protectionist policies and MOC has stated that the majority of the Chinese public were “against the brand falling into foreign hands.” Political and public pressure of this type may be the likely reason for default, rather than protectionist policy. In fact, Coke may have shot itself in the foot rather here because of its execution strategy.

The details of the acquisition were leaked to the press, perhaps to pressure the government to approve the deal, perhaps not. After all, with the world’s governments anticipating the outcome; pressure was on Beijing to allow the acquisition to proceed. However, as soon as word got out, public reaction to it went in the opposite direction.

A patriotic China was not in a mood to have its “national treasure” of a brand be snapped up by a foreigner and MOC found itself caught in the middle. Apart from a possible resentment towards pressure from Coke and its allies to approve the deal, public sentiment began to make it difficult for the Ministry to capitulate, even if they had wanted too.

Moreover, it was an odd decision to have a foreign law firm, rather than a Chinese firm, handle the M&A application in China indicating that Coke’s strategy may not have been solid. We’ll probably never know the real reasons that led to the acquisition being denied. But then neither is it entirely fair to suggest that the failure of the deal is a sign of China protectionism either.

Doing business in China is never simple and whatever position the MOC found themselves in, they also were in a no-win situation. M&A deals in China need to take into account the public sentiment and political pressure that can affect it. Coke ultimately failed in this regard, but to call M&A deals in China dead as an investment strategy is also far from the truth and premature.