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Seeing Red Over Big Blue's China Deal

When the Japanese were awash in dollars in the '80s from a yawning trade surplus with the U.S., their purchase of one of America's crown jewels -- Rockefeller Center -- set off howls of protest. Now the Chinese, with a pile of greenbacks from an even bigger trade imbalance, are creating a ruckus in Washington by buying a piece of another U.S. icon: IBM (IBM).

Unlike the noisy but impotent response to the Rockefeller Center deal, however, the Chinese purchase has prompted a government panel, the Committee on Foreign Investments in the U.S., to probe whether Lenovo Group's $1.25 billion purchase of IBM's PC business might imperil national security.

Several agencies, which sources say include the Homeland Security Dept. and the FBI, have expressed concern that the IBM sale could help China's military. Among the issues is the possible transfer of encryption technology. Another fear: the proximity of higher-end IBM operations in Research Triangle Park (N.C.) to the site Lenovo will buy, which could make industrial espionage easier.

The probe was requested by three powerful House Republicans, including International Relations Committee Chairman Henry J. Hyde (Ill.), Armed Services Committee Chairman Duncan Hunter (Calif.), and Small Business Committee Chairman Don Manzullo (Ill.). Trade is important, Hunter says, but "the security concern is overriding."

Chinese Shopping Spree?

The IBM deal could be just the start of a strategic buying binge by China as it recycles an estimated $400 billion in dollar reserves. Right now, Uncle Sam can kill a deal only for national security, not economic, reasons. "It may be appropriate to have a broader model," says William A. Reinsch, president of the National Foreign Trade Council, a business group that promotes trade.

To strengthen its hand, IBM has hired a lobbyist who once worked for Senate Majority Leader Bill Frist (R-Tenn.) and legal powerhouse Covington & Burling. But even some hard-liners on China doubt that the deal poses a risk. Unlike companies with close ties to the Red Army, Lenovo "is not an arm of the Chinese military," says Larry M. Wortzel, an Asia expert at the Heritage Foundation. And to assuage concerns, IBM could wall off certain operations in North Carolina to prevent leakage. A spokesperson says IBM remains "confident in the process and its outcome."

Some experts have broader concerns about a Chinese shopping spree. Michael R. Wessel, a Washington consultant and member of the congressionally appointed U.S.-China Economic & Security Review Commission, fears that unlike Japan, China won't invest in the U.S. and bolster the American economy but will take the technology and run. Wessel says that happened after the 1995 purchase by Chinese companies of Anderson (Ind.)-based Magnequench, which made railroad magnets used in the guidance system of smart bombs.

A lot of people in Washington "are suspicious of selling anything remotely useful to the Chinese," notes Reinsch. Some of those suspicions stem from the leakage of technology to China in the 1990s and recent sanctions against Chinese companies for selling gear to Iran. The IBM sale may go through, but experts expect the U.S. to cast a more skeptical eye on future deals with China.

The U.S. Chamber of Commerce is opening new fronts in its legal battle with the Securities & Exchange Commission. On Jan. 18, the Chamber filed a friend-of-the-court brief in support of Siebel Systems (SEBL), which the SEC has charged with violating a 2000 rule that bars companies from selectively disclosing material information. The Chamber is challenging the SEC's legal authority to impose the fair-disclosure rule, known as Reg FD, and argues that it infringes on execs' freedom of speech and association. The Chamber had already sued the agency in U.S. District Court last September seeking to overturn a rule requiring chairmen of mutual-fund boards to be independent of the fund's investment adviser. Next up: The Chamber may file a brief supporting a hedge-fund manager's suit to overturn the new SEC requirement that hedge-fund advisers register with the SEC.

As Washington shifts more costs to states -- witness the Medicaid cuts expected in President Bush's 2006 budget -- liberals worry that states' antiquated tax systems can't bear added costs. Fueling those fears: a new study charging that Corporate America is slashing its state income tax tab. In an analysis of 252 large, profitable companies, Citizens for Tax Justice found states reaped 2.3% of profits in 2003 -- down from 2.9% in 2001 and far below the states' official tax rates, which averaged 6.8%. The labor-backed CTJ says total state collections from corporate income taxes have fallen 40% since 1989.

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