%0RPT-SPECIAL REPORT-The U.S. and China start an M&A Cold War

%0 every investment, according to a Dec.
2009 cable.

“It just causes too many headaches and we’d never get
anything approved,” the executive said.

Some of the resistance to U.S. acquisitions may lie in an
increase in patriotic sensibilities in China.

The cables show, for example, that a speech then U.S.
Treasury Secretary Hank Paulson gave at the Shanghai Futures
Exchange in March 2007 didn’t go down well with everyone in the
audience.

A top Shanghai financial department official, Fang Xinghai,
admonished Paulson for his assertion that he had never seen a
successful joint venture securities firm. This was seen as a
“direct attack” on the Chinese model that had allowed Goldman
Sachs to set up the joint venture when Paulson was CEO of
the Wall Street firm.

In a meeting with the Shanghai consul general, Fang was also
reported as saying: “Some Chinese officials questioned the tone
of Secretary Paulson’s remarks, noting that he had spoken ‘very
directly’ and ‘was telling us what to do.'”

“It had caused some in the audience to react in a
‘nationalistic’ or defensive manner,” Fang and Shanghai Futures
Exchange CEO Yang Maijun were reported in a cable as concluding.

Such nationalistic sentiments got a boost after the
financial crisis. Some financial services and private equity
executives cited in one Feb. 2010 cable from Hong Kong pointed
to “China’s rising assertiveness in light of the country’s
continued growth and positive role in the global recovery.”

“Although the U.S. still had considerable influence in the
region, security reviews that made it difficult for some
travelers to obtain U.S. visas and high profile CFIUS-related
cases had damaged America’s reputation in Asia for openness,”
one executive said in the cable. “Following the financial
crisis, Asians’ tolerance for being lectured by the West had
markedly declined.”

Of course, not every deal gets shot down.

Late last year, state-owned China Huaneng Group Corp agreed
to buy a 50 percent stake in Burlington-based electric utility
InterGen for $1.2 billion in cash. CNOOC came back to
the United States in recent months as well with joint venture
investments in Chesapeake Energy Corp shale projects.

Last week, executives from CNOOC and Huawei were on a charm
offensive on the U.S. West Coast.

CNOOC Chairman Chengyu Fu said in Los Angeles the atmosphere
for foreign investments in the United States was welcoming and
it planned to make more through partnerships, while Huawei U.S.
division group chief technology officer Matt Bross said that
after the 3Leaf deal disappointment, more formal channels had
been created between the company and the U.S. government and
there was now “a better understanding.”

But in many ways the picture in Washington may be
deteriorating.

Lawmakers on Capitol Hill indicated in a series of
interviews that they are far from feeling more receptive to
Chinese takeovers of anything remotely sensitive in terms of
military or technological value. And fears that China is
starting to pour its economic might into a more powerful
military is adding to the wariness.

“The Chinese buildup of its military, particularly its naval
fleet, has made people more concerned about what China’s
ultimate intentions are,” said Republican Senator Susan Collins
when asked about the sensitivity of Chinese acquisitions. “So, I
think there is a great deal of concern.”

Collins said she was particularly worried about inroads
China has made into the U.S. telecommunications industry based
on classified briefings she has received. Cyber attacks
emanating from China and seemingly aimed at the intellectual
property of U.S. companies were another concern, she said.

EVERY BUSH AND TREE

For Democratic Senator Jack Reed it is the close ties
between Chinese companies and the government in Beijing that
makes him suspicious.

“The real concern — and it has to be case by case — is
that many of these companies are so closely intertwined with the
government of China that it is hard to see where the company
stops and the country begins, and vice versa,” he said.

Such thinking doesn’t go over well in Beijing. “It’s
excessive anxiety,” said Mei Xinyu, a researcher at a think tank
in China’s Ministry of Commerce.

“For the U.S., every bush and tree looks like an enemy
soldier,” he said, adapting an old Chinese saying.

The next 18 months could be particularly rocky for Sino-U.S.
dealmaking, according to William Reinsch, president of the
National Foreign Trade Council, a business association focused
on international trade and investment issues.

The U.S. Presidential and Congressional elections are due in
November 2012. And in China towards the end of next year,
President Hu Jintao is expected to hand over the reins of power
to his heir-apparent Xi Jinping.

“We could see a deterioration next year that is politically
motivated in both countries — in that case I think you have a
potentially very serious problem,” Reinsch said.
(Reporting by Paritosh Bansal and Soyoung Kim in New York,
Benjamin Lim in Beijing, and Thomas Ferraro and David Lawder in
Washington; Editing by Martin Howell, Jim Impoco and Claudia
Parsons)

%0RPT-SPECIAL REPORT-The U.S. and China start an M&A Cold War