Theft by other means: China’s assault on foreign companies

Wednesday, January 1, 2014

Theft by other means: China’s assault on foreign companies

Derek Scissors | December 19, 2013, 8:16 am

If Senator Max Baucus becomes the next US Ambassador to China, he will start day one with a very big problem. China’s economic reform program is barely a month old and already appears fraudulent in critical respects. In particular, attacks on foreign companies, which began earlier this year, are growing far more threatening. The health of the American technology industry, especially, is at risk, and the credibility of US policy is being challenged.A new Chinese government was installed in March, and a revival of economic reform seemed possible. Almost immediately afterward, though, state-run media began attacking foreign companies. Government regulators became involved, claiming foreign companies charged illegally high prices. The prices were said to be too high by reference to China’s anti-monopoly law, though little or no attempt was made to show the companies were monopolies.

What was actually happening was intimidation by the National Development and Reform Commission (NDRC), the economic planning body and a long-time opponent of open markets. The NDRC did not want a legal dispute even within China, where it is the most powerful regulatory agency and courts are entirely controlled by the Communist Party. So it attempted to bully foreign firms into forgoing legal or public relations defense and just accepting price controls.

At its much-touted plenary meetings, the Party vowed, among other things, to remove some price controls. But hopes of a course change in this matter are being incinerated. The efforts at browbeating groups of foreign companies are morphing into efforts at browbeating individual foreign companies. The attempts at imposing price controls are expanding into attempts to steal technology.

The principal target, for the moment, is American telecommunications technology. The Party is using the anti-monopoly law to assail small and large American telecom firms. A small company is charged with being an abusive monopoly, despite never making a penny in China, and told it better not defend itself. A large company faces a prolonged intimidation campaign along the same lines.

What is actually happening is plain here, too: China is currently rolling out fourth-generation telecom networks. American companies and their patent rights are in the way. A year ago, China promised yet again to forgo coercive technology transfer. Two months ago, a high court judge in a telecom case in the birthplace of Chinese economic reform called the country’s anti-monopoly law a great way to break the barriers created by foreign technology ownership.

The assault on foreign telecom is bad enough, but there is no reason to consider this an isolated incident. China’s record on competition and protection of intellectual property has been abysmal. And another target is in sight: semiconductors. State-owned enterprises have bought two large, private Chinese chip-makers in the past six months. With the Chinese private sector out of the way, the NDRC can move to coerce foreign firms into turning over patents on highly discounted terms.

Nothing less than the credibility of American policy is at stake. The 24th annual meetings of the Sino-American Joint Commission on Commerce and Trade are occurring December 19th and 20th. In past meetings, China repeatedly promised not to pressure foreign companies. What point is there in talking further on these topics when Chinese behavior has gone from mediocre in 2012 to bad in the middle of 2013 to outright dangerous now?

The issue extends further. China has undermined the expansion of the Information Technology Agreement. July saw a purported breakthrough in China-US talks on a bilateral investment treaty (BIT). But the NDRC’s current actions are utterly incompatible with good-faith BIT negotiations, or for that matter the Trade In Services talks.

The American government – not just the usual agencies involved in trade but also the Department of Justice and the Federal Trade Commission – need to recognize the threat and respond in unified fashion. This will require far more coordination among agencies and leadership from the White House.

One necessary element of the response is strong, international restrictions on state-owned enterprises. There are multiple ways to pursue this goal, but the main one at present is through the Trans-Pacific Partnership (TPP). Congress, including Senator Baucus, has already indicated the importance it places on constraining state firms. China’s behavior makes a strong TPP position on competition even more important.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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