Wall Street investors warn that deal making suffers as US stokes anti-China fears

While acknowledging national security concerns, financiers say trade war threatens key cross-border investments

PUBLISHED : Wednesday, 18 July, 2018, 1:24am
UPDATED : Thursday, 19 July, 2018, 3:09am

As the trade battles between the US and China intensify, Wall Street investors are calling for ways to protect American national security without stymieing cross-border investments and economic growth.

Investors from Blackstone Group and Oaktree Capital, among others, have warned that unless curbed, the escalating disputes are likely to drain capital from China and bring pain to US businesses.

“If we create a system that makes it very difficult for capital to come here, it’s going to increase the cost of capital for us as a country,” Blackstone’s president, Jonathan Gray, said recently at Wharton Global Forum. “I am hopeful that policymakers will come up with a way that will protect national security interests, but very importantly, we don’t lose the part that leads to economic growth and jobs.”

Howard Marks, founder of the investment firm Oaktree, echoed that thought. “The capital system is what makes America great,” he said. “Economics needs long-term allocation of resources.”

Like many US investors, Blackstone and Oaktree, which combined manage more than US$500 billion, have a long history of doing business with China. Oaktree opened its Beijing office 11 years ago, and Blackstone co-founder Stephen Schwarzman started a scholarship programme at Tsinghua University in 2013 to “educate future leaders about China”.

But on Tuesday, at the Politico Pro Summit conference in Washington, panelists discussed China’s long-time treatment of intellectual property and technology transfers – business practises that had raised national security issues in the first place. Politico and the South China Morning Post have a content-sharing partnership.

“Acquisitions by Chinese companies of US technology often undermine the US economy and our national security. We need to have a serious look at the investment regime that we have now. We need to have a more comprehensive view and a greater insight into what’s being acquired and why it’s being acquired,” Carolyn Bartholomew, vice chair of Congress’s US-China Economic and Security Review Commission, said.

Even so, she added, “we are very sympathetic to the interests of governors and mayors trying to get investments to come in to help build infrastructure. The goal is not to cut off all Chinese investments.”

The commission was created in 2000 to help guide congressional decisions on how to manage US engagement with China.

In April, the commission said in a report that “nefarious actors linked to China have targeted the networks of private sector entities and private sector government contractors in order to obtain sensitive government information and to exploit vulnerabilities within federal information systems.”

“China has expanded its efforts to obtain economic advantage by pursuing knowledge of key technologies through corporate acquisitions and by using the economic power of Chinese companies as tools of the state,” the report said.

Moreover, China’s ambition to become a global technology leader by 2025 has caused concern within the Trump administration. The US has called for a crackdown on China’s attempts to obtain leading US technology firms through mergers and acquisitions, as well as forcing technological transfers through joint ventures, in exchange for access to the huge Chinese market.

That led to a willingness “to play a national security card where economics is concerned more than any time I remember,” said Geoffrey Garrett, dean of the University of Pennsylvania’s Wharton School.

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Congress has moved to expand the scope of review by the Committee on Foreign Investment in the United States, an inter-agency body known as CFIUS, which monitors overseas investments for national security concerns.

Such measures have started to cool the deal landscape. In the first half of 2018, Chinese investment in the US hit a seven-year low, dropping more than 90 per cent to US$1.8 billion from a year earlier, according to the Rhodium Group, a New York consulting firm.

“The phase we are in, I call it ‘Trump unchained’,” said DJ Peterson, president of the geopolitical research firm Longview Global Advisors. “He is running the country like running a small business, shooting from the hip.”

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Uncertainty is particularly palpable in the tech community, where most deals related to national security issues take place.

“To be honest, six months from now it could be a whole different game,” said Jason Lin, managing director at CICC Global Bridge Capital, referring to the current volatility in the China-US relationship.

Wayne Shiong, a partner at Beijing-based China Growth Capital, which invests in tech, media and telecoms, said that while he continued to see high demand for tech deals and “big tech funds are being set up”, he believed “trade between the two countries is going to slow further.”

Early this year, US President Donald Trump blocked the US$117 billion acquisition of chip maker Qualcomm by Broadcom because of concerns about the buyer’s ties to Beijing. Congress has pushed back on Trump’s deal that saved Chinese telecoms giant ZTE Corp from collapse, and is still debating how to restrict the company’s business exposure because of national security concerns.

This month, state-owned wireless carrier China Mobile became the latest victim after the US rejected its application, filed seven years ago, to operate in the US. National security issues were again cited as the reason.

Blackstone recently had its own taste of a funding cut-off. In February, China’s sovereign wealth fund sold all of its nearly 10 per cent stake in the firm, ending an 11-year business tie.

The investment firm said in the same filing with the US Securities and Exchange Commission that “changes to international trade agreements or the imposition of tariffs” could “increase costs, decrease margins, reduce the competitiveness of products and services” and “adversely affect the revenues and profitability of companies whose businesses rely on goods imported from outside of the US.”

“The national security issue is a challenge. Here we are discussing where the pendulum should swing,” said Blackstone’s Gray. “The US today is probably the most attractive place to invest. We want capital to come in.”

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