China: A Revolt Against Foreign Takeovers

Chinese bloggers and businessmen are putting pressure on Beijing to crack down

Xiang Wenbo is on the warpath. He's angry at the number of Chinese companies falling into foreign hands, and he's using the bully pulpit of the Internet to share his opinions with the rest of China. "We are selling our signature enterprises to foreigners," Xiang wrote on his blog on June 23. "Are we losing our minds?"

Xiang, it must be said, isn't exactly a disinterested observer. His primary beef is a proposed $375 million deal to sell 85% of ailing Xugong Construction Machinery Group Co., China's largest maker of cranes, to Carlyle Group, the well-connected Washington private-equity firm. Xiang is executive president of Sany Group, China's biggest private manufacturer of construction equipment and a rival bidder for Xugong. "In the past we hoped we would get advanced technology from foreign companies, but this never happened," Xiang said in an interview at Sany's headquarters in the steamy southern city of Changsha.

Don't let the fact that Xiang has skin in this game mislead you. His rants reflect a growing sentiment in China. For nearly three decades, Beijing has thrown down the welcome mat for foreigners in hopes of gaining the knowhow to kick-start China's plodding state economy. Now academics, business leaders, and government officials are questioning that strategy. "There should be severe measures to curb and punish hostile takeovers aiming to monopolize the Chinese market," Li Deshui, former head of China's National Bureau of Statistics, told the annual National People's Congress in March.

That sort of bluster is starting to spur government action. On June 24, Beijing announced it will set up a commission to combat monopolies, which could hurt overseas companies that have dominant market share. It's also considering new rules that would limit foreign participation in several industrial sectors, and might draw up a list of as many as 30 heavy machinery manufacturers that are off-limits to foreigners. Such regulations could effectively block Carlyle's investment, though both Carlyle and Xugong say they still expect the deal to go through. And to encourage the growth of local brands, Beijing is offering low-interest loans to domestic carmakers and aims to lift the share of Chinese nameplates to 60% by 2008, up from 20% today. "China should not just be the world's factory," says Daniel Dai, chief investment officer of Geely Automobile Holdings Ltd., China's No. 2 domestic car manufacturer.

It's no surprise that the issue is being raised now. Foreigners such as Coca-Cola (KO ), General Motors (GM ), Michelin, and Nokia (NOK ) have all benefited from policies such as preferential deals for land and energy, and tax rates that are about half what locals pay. More important, foreign investors spent $33.4 billion on mainland enterprises last year, a 39% increase over 2004. "Precisely because there is a surge in activity, voices are being raised, asking what the consequences are," says Graham Matthews, a partner at PricewaterhouseCoopers' Transaction Services in Shanghai.

Even with the protectionist rumblings, though, foreigners won't likely get the boot anytime soon. China is continuing to open its markets, and Matthews, for one, says China remains more hospitable than Japan or Korea. And on June 4 the People's Daily -- the Communist Party's top paper -- published a strongly worded editorial proclaiming that "reform and opening up have invigorated China. It's an important choice that determines China's destiny today."

Still, the growing economic nationalism has provided a weapon for the likes of Sany as they face off against foreigners for acquisitions. "We have to have power over our economy," Xiang says. "Only then will our economy not be affected by factors outside our control."

By Dexter Roberts

    Before it's here, it's on the Bloomberg Terminal.