Behind the Juicy Story

Who would have thought juice would make headline story. An potentially important news that slipped through last few days was that Coke is bidding the takeover of HuiYuan, a dominant Chinese juice make for $2.4B, potentially making it the biggest takeover bid of Chinese firms to date.

The outcome of this take over bid will have much to say about the direction of Chinese global economic policy. Internet opinions, especially those have promoted for domestic name brands, have seen plenty of displeasure of yet another multinational takeover. Do not discount the importance of beverages either; America has been through an similar episode of foreign bid, by a Belgium beer maker, of maker of Budweiser. That deal ended in veil. Chinese fruit juice groups were considering joint opposition to the deal, arguing the proposed takeover, which if successful would give Coke a dominant share of the market, would put them at a competitive disadvantage and threaten their survival. Market awaits to see if the deal can get pass regulator overhang.

But, what is the deeper revelation of this juicy story? The coming takeover touches a nerve of the public, not only the business communities, because foreign capital has permeated many Chinese businesses, many of which, the public believe, have been sold under value. A criticizer would point to high dividend payouts, higher than the IPO take-home of Chinese state banks. Complicating matter is that China is a transition economy from a socialist system, and a lot of the assets sold was accumulated while other parts of the economy was making sacrifice. So, possibly of "sell-out" is always on people's mind.

Yet, such takeover scenarios are inevitable. In particular, current economic structure precisely dictated that, even when Americans are mounting historical deficit against the Chinese. The comparative advantage of the American economy is no longer in manufacturing. In stead, it's more and more in corporate financing, even when its financial markets are in turmoil at home. On the Chinese side, the financiers, mainly banks, have their own bigger moral hazard problem; and for firms, the prospect of property right protection would be higher with foreign capital involvement. It thus creates incentives to sell assets to U.S. capitals seemingly undervalue. Therefore you get the current financial structure. Capital flows from China to the U.S. for low-risk, un-intermediated investments, mainly government bonds, keeping the interest low. Capitals then flow back to China for intermediated investments, snatching up assets. So, for China, the biggest concern is the American inflation; and for American investments, the biggest concern is Chinese growth.

It is a convenient and attractive setup for both sides right now. The real test comes when Chinese economic growth gets stalled, thus amplifying the asset risk. There is a lot of riding, of both sides, on the Chinese economy.

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