Amid falling asset prices and the sharp devaluation in currencies caused by the Covid-19 pandemic, countries across the world are slamming shut their doors on Chinese investors to prevent aggressive takeovers of homebred companies.

A few days ago, India was caught by surprise when it learned that the Chinese central bank (People’s Bank of China) had upped its stake in HDFC to 1%.

The Prime Minister’s Office has been receiving distress calls from various industry bodies sharing their concern. It had got a letter from the Integrated Association of Micro, Small and Medium Enterprises of India, an industry body, warning about possible hostile takeover bids from Chinese investors when they are facing survival issues and their valuations have taken a beating amid the Covid-19 crisis. The Indian Council of Investors, an investor association group, too had raised red flags on possible hostile Chinese takeovers.

“We seek your kind guidance and support for protecting the Indian corporate sector from being sold in distress to the Chinese companies on the prowl,” said the industry body of MSMEs in a letter dated April 12.

The government was quick to react. In a press release dated April 18, the Department for Promotion of Industry and Internal Trade (DPIIT) stated that foreign investments from countries with which India shares land borders, shall be under the approval route.

Also, “transfer of ownership of any existing or future foreign direct investment (FDI in an entity in India, directly or indirectly, resulting in beneficial ownership falling within this restriction will require government approval.” In simple terms it meant investment even in a single share of a company via the FDI route from seven countries that share borders with India will need prior approval of the government. This approval will be mandatory for all sectors irrespective of the quantum of FDI permitted in them under the automatic route.

The move comes close on the heels of market regulator Securities and Exchange Board of India (SEBI) asking custodian banks to disclose details of ultimate beneficial owners’ of foreign portfolio investors (FPIs) based in Chian or Hong Kong. The press note states that this review is for curbing opportunistic takeovers or acquisitions of Indian companies amid the current Covid-19 pandemic.

Anushree Paul, trade economist at BML Munjal University, says that new start-ups getting investments from China will find it hard in the short-run, “but in the medium and long-term effects are ambiguous”.

In the wake of the new FDI policy, China has sought its revision, calling it “discriminatory”. "We hope India would revise relevant document practices," spokesperson of Chinese Embassy in India said.

Much before India, the U.S. and European Union countries had seen the danger. They had realised that many western manufacturers will face financial uncertainty as a result of the coronavirus epidemic, making them easy prey for Chinese companies, which were already on a buying spree in the West.

In the U.S., for instance, the Committee on Foreign Investments in the US (CFIUS) is now playing an active role in screening potential takeovers on national security grounds. While the European Union has no CFIUS, but different countries are taking different routes to protect their own companies. Germany has introduced a new bill that allows regulators to scrutinize investments that are likely to affect the country’s security.

Similarly, the UK government screens acquisitions in the military, dual-use, computing hardware, and quantum technology sectors. Italy too has strengthened its “golden power,” which allows government to veto or impose restrictions on takeover of companies to be strategically important.

Western companies have already passed business aid packages to make sure that companies don’t go under. But that’s not enough. Margrethe Vestager, the European commissioner for competition, has just proposed that European governments buy stakes in each other’s vital companies to prevent Chinese takeovers.

A study by the Foreign Policy magazine shows that in 2019, Chinese entities invested 11.7 billion euros (nearly $ 13 billion) in European Union countries, the vast majority in mergers and acquisitions and only minimal amount going into forming new companies.

Interestingly enough, in these difficult times, China is one of the few countries that not only has huge foreign exchange reserves—over $3 trillion—but has also announced billions of dollars as stimulus to its companies. This gives them enough firepower to buy up companies abroad.

But with most countries downing shutters for Chinese players, the old Chinese stratagem of chèn huǒ dǎ jié (loot a house when it is on fire) may not work.

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