China Will Suffer Its Government's Qualcomm/NXP Foot-Dragging the Most
China attracted $144 billion of foreign direct investment last year – a record total for the country. But the appeal of China as an investment destination is at risk. The cause for concern is neither escalating tariffs nor any high-profile external threat. The Chinese government—by politicizing a non-controversial cross-border corporate merger—is tarnishing its own attractiveness for investment. And with the merger facing a July 25 deadline for completion, the world’s investors are watching to see if China can be trusted to act responsibly.
The backdrop to the issue is an October 2016 deal by San Diego-based Qualcomm to acquire a Dutch semiconductor company, NXP, for $43 billion. Because both companies are leaders in the semiconductor industry, and generate a significant share of their revenue from China, the government in Beijing has indicated that it must give the merger its seal of approval – something that eight jurisdictions have already done (including the United States). But there’s been no signal from Beijing as to when (or whether) it will act. And with the companies having set a deadline of 11:59 p.m. on July 25 (eastern standard time) for completing the merger, the entire transaction could be scuttled if Beijing continues to drag its feet.
Given the U.S.-China tariff tussle, some in China may relish the opportunity to punish a leading U.S. company. But that’s misguided thinking, as it’s China that will suffer the consequences if government interference causes the Qualcomm-NXP merger to collapse. Inaction (or outright opposition) will only reinforce concerns throughout the world about the country’s suitability as an investment destination, as it will suggest politicization of the regulatory process.
Continued obstruction could also lead to immediate blowback. Earlier this year, the Trump Administration announced it would block U.S. companies from selling to a Chinese telecom firm, ZTE, which has done business with North Korea and Iran – a clear violation of U.S. sanctions policy. President Trump said he would relax the prohibition, in response to a request from President Xi. And on July 6 the Trump Administration announced that U.S. companies would be able to resume selling to ZTE, subject to the company meeting a number of terms.
If China returns the favor by, in effect, stiffing a leading U.S. company, the response from Washington could be severe. Congressional critics could seek to have the Trump Administration’s ZTE decision repealed, and other leading Chinese companies, such as Huawei, would be in the crosshairs. And the ongoing tit-for-tat tariff battle could be escalated.
Beijing’s delay is also damaging because it’s contrary to the spirit of a reform the government implemented just a few months ago. That reform merged three anti-trust agencies into one – the State Administration for Market Regulation (SAMR). SAMR was supposed to foster greater predictability and transparency in the review of companies merging or making acquisitions. The Qualcomm-NXP merger serves as SAMR’s first major test – one that it’s currently failing. Continuing this arbitrary approach would send a powerful signal to current and potential foreign investors that perhaps they should direct their investments to countries offering more predictable – and more hospitable – climates.
Depressed investment would weaken China’s economy at a moment when the country’s economic growth rate has been in a prolonged slowdown, relative to what was achieved over the previous two decades, and with demographic pressures threatening to drive down the growth rate even more. Foreign direct investment can be a powerful catalyst for opportunities the country needs. As Goldman Sachs has pointed out, “The foreign capital, and the management expertise that so often comes with it, would promote innovation and entrepreneurship, which are critical to any economy's long-term success. Deploying private capital also helps foster healthy competition, making state-owned enterprises more efficient and better suited to compete in the global marketplace.”
It's noteworthy that amid the surge in foreign direct investment to China, the annual U.S. flow has been mostly stagnant since 2005 (it rose in 2008 and plunged in 2009). The stagnation is troubling, given that the U.S. and China are the two largest economies in the world, and their economic relationship is the most important in the world. That relationship is already being challenged by trade tensions. Some elements of that standoff are, to be sure, beyond Beijing’s control. Yet China would have nobody to blame for the self-inflicted wounds that would be a byproduct of blocking the Qualcomm-NXP merger.
China has made great strides in recent years in promoting economic liberalization and transparency. As part of that progress, the eyes of investors throughout the world have been watching to see if China can establish a fair regulatory environment. Now, with tensions and uncertainty on the rise, China has an opportunity to confound its critics. It’s an opportunity that shouldn’t be missed.