“If we don’t take action, foreigners may think of Chinese as cashed-up fools.” Thus Guo Guangchang, one of China’s biggest overseas acquirers, last month praised Beijing’s efforts to halt what he described as an irrational overseas shopping spree by the country’s major corporations. Leaving aside his motives in chiding an activity for which he blazed a trail, Mr Guo has misdiagnosed the problem. The concern for western business is not that its Chinese counterparts may have more money than sense, but that they have little idea who or what to trust. The phobia applies equally in dealings with private and state-owned Chinese companies, though for different reasons. Personal integrity appears to be a secondary issue; China has had its share of corporate scam artists but chicanery is a feature of all business cultures. The key challenge for western companies is that Chinese bids emanate from a domestic context that is difficult to understand and impossible to predict. The invisible hand of the Communist party can permit market forces to flourish for a while, only to abruptly curb such freedoms when they no longer serve a higher purpose. “The risks associated with Chinese investments overseas are usually of three types,” said Yu Jie, head of the China Foresight Project at the London School of Economics. “There are economic risks, political risks and ones associated with the omnipresence of the Chinese Communist party.” All three of these are “inevitably intertwined” given the nature of China’s political system, she adds. They “do not always follow economic rationality”. Such dynamics may imperil large chunks of an official $170bn in overseas investments that Chinese companies made last year. But how much and which deals? The truthful answer is that there is no way anyone outside a tiny number of party officials can know. Take the recent crackdown on four large private companies, Anbang, HNA Group, Dalian Wanda and Mr Guo’s Fosun, which together have made some $55bn in overseas acquisitions in recent years. At the start of this year, the bosses of all four were riding high, ostensibly at least, snapping up foreign assets at a manic pace and basking in their corporate hagiographies. Now, the chairman of Anbang, Wu Xiaohui, is in detention. Wang Jianlin of Dalian Wanda is offloading prize assets to repay debts. Mr Guo is writing letters praising the probe that his company is caught up in and HNA’s chief executive, Adam Tan, is trying to explain his company’s opaque ownership structure. While outwardly none dare to criticise China’s authorities, privately they are seething as share prices take a dive. “The regulators are crazy,” said an executive from one of the four, who declined to be identified. Jonathan Fenby, chairman of the China team at TS Lombard, a research company, traces the crackdown back to the dramatic abduction of Xiao Jianhua, head of the Tomorrow Group investment company, during the Chinese new year. He was taken by mainland security agents from the Four Seasons hotel in Hong Kong, seated in a wheelchair with a blanket over his head. Mr Fenby says that under questioning the businessman told how he moved money offshore for Chinese tycoons, thus swelling the torrents of capital flight that China suffered in 2016. “Briefed on his confession, [President] Xi Jinping is reported by several sources to have gone into a rage, pounded his fist on the table and demanded action against the culprits,” Mr Fenby says. But if the crackdown is focused on private companies, does that mean that state-owned enterprises are safer options for western companies to deal with? While it may be the case that SOEs enjoy more secure relationships with their ultimate owners in the Communist party, they are also problematic. One issue is that the board-level executives who negotiate deals with companies overseas do not call the shots. Unidentified party officials, who may sit in the State-owned Assets Supervision and Administration Commission or elsewhere, not only pick SOE top executives but also direct corporate strategies. It is thus hard for western companies to reach a level of comfort with Chinese counterparts. This may have mattered less before China Inc spread its wings. “Beijing could afford to be unpredictable back in the early age of economic opening up,” says Ms Yu. “But not now when its economy and international credibility are closely linked to the rest of the world.” Published in Daily Times, August 13th 2017.