China Gets Cold Feet For Foreign Investment

Negative publicity on blogs and chat rooms linked to by popular Chinese portals Sina.com and Sohu.com is credited with fueling criticism of several high-profile deals.

For instance, the District's Carlyle Group tried in 2005 to buy an 85 percent stake in Xugong Construction Machinery, a market leader. Xiang Wenbo, chief executive of a state-owned rival company, wrote on his personal blog that the government shouldn't permit the sale of valuable strategic assets like Xugong. After he and other opponents waged a months-long online campaign against the deal, Carlyle scaled back its offer, taking a 50 percent stake.

Albert Keidel, a former U.S. Treasury official now at the Carnegie Endowment for International Peace, said there seemed to be a sense among ordinary Chinese citizens of "how much are we going to allow foreign companies to continue to take advantage of us?"

Egged on by a public concerned about the growing influence of foreign companies, the Chinese government in July placed restrictions on the purchase of real estate by foreign individuals and institutions. The next month, it put a moratorium on foreign acquisitions of brokerages and limited the competitiveness of foreign-funded retail companies.

In November, the government issued new guidelines for cross-border mergers and acquisitions, making it more difficult for foreign companies to be involved in deals with companies related to "national economic security" or those that have a "famous trademark" or "traditional brand."

In a report issued last month, the Organization for Economic Cooperation and Development complained that the new regulations were so vague that they "may have a serious unintended discouraging effect on investments."

Some economists, however, say fears about Chinese nationalism and protectionism are overblown. Zhao Xijun, a professor of economics at Renmin University, said that rather than being seen as a hostile move against foreigners, the restrictions should be seen as "progress to a mature market."

Kenneth Louie, a visiting professor of economics at the Johns Hopkins-Nanjing University Center for Chinese and American Studies, points out that the United States limits technology transfers to China and restricts foreign purchases in defense industries.

"There are certain sectors China believes are vital to economic security, and there is a fear of a high level of foreign intrusion. The United States also has similar fears," he said.

Keidel said China has in a short period moved from a closed economy where foreign capital was not allowed to one that welcomes it, particularly in such areas as financial services, one of the key conditions China agreed to when it acceded to the World Trade Organization.

The conditions China ratified were quite specific and provided an industry-by-industry timetable. The new foreign-investment regulations do not seem to violate the letter of these conditions, Keidel said, though some parties have complained that they go against the spirit of the WTO agreement.

Richard Ji of Morgan Stanley Hong Kong said some companies have used China's new rules as an excuse for their own marketing or strategic shortcomings. He said that in the cases of Google and eBay, the companies' challenges have had more to do with failure to tailor the content of their Web sites to Chinese tastes and needs.

In the Baidu commercial about Google, the Western man begins by saying "I know" repeatedly as he stands, smirking confidently, next to his bride-to-be. But after the Chinese man bursts on the scene and the two get into a war of words, the Westerner becomes confused. By mistake, he says, "I know I don't know that I don't know" -- at which point the disgusted bride runs away.

So the commercial is "not about nationalism and protectionism," Ji said. "It says that it's localization that gives success. If you localize services, it means you understand the people you are selling to."