Dif­fer­ent anal­y­sis meth­ods cause of fric­tion

China Daily (Hong Kong) - - COMMENT - Michele Geraci The au­thor is head of China Eco­nomic Pol­icy Pro­gram and as­sis­tant pro­fes­sor of fi­nance at Not­ting­ham Uni­ver­sity Busi­ness School, China.

Re­cent trade fric­tions be­tween China and Europe have high­lighted their dif­fer­ent ap­proaches to ad­dress­ing such is­sues, and in my view, this stems from the lat­ter side’s in­abil­ity to prop­erly an­a­lyze China’s econ­omy and as­sess China’s de­mands.

In statis­tics, there two main method­olo­gies used to an­a­lyze data: one is cross-sec­tional anal­y­sis, the other is time-se­ries anal­y­sis. The two meth­ods dif­fer in that cross-sec­tional anal­y­sis com­pares the cur­rent value of a cer­tain vari­able with the cur­rent sta­tus of the same vari­able in other coun­tries. While time-se­ries anal­y­sis fo­cuses more on com­par­ing the cur­rent value of a vari­able with the value of the same vari­able in the past.

In other words, cross-sec­tional anal­y­sis is a static com­par­i­son of how things are to­day, while time-se­ries anal­y­sis re­veals how things have changed over time.

When an­a­lyz­ing China’s econ­omy, a sim­i­lar dilemma oc­curs: West­ern an­a­lysts tend to take a cross-sec­tional ap­proach and com­pare China to­day with, say, Europe, as it is to­day. China ap­pears late on many met­rics of eco­nomic de­vel­op­ment, such as the open­ness of its mar­ket, the de­vel­op­ment of its fi­nan­cial sys­tem and so on. The re­sult is that West­ern pol­i­cy­mak­ers often push China to ac­cel­er­ate re­forms and of­fer rec­i­proc­ity.

How­ever, Chi­nese an­a­lysts tend to be time-se­ries an­a­lysts and com­pare China to­day with where China it­self stood one or two decades ago. Clearly, when look­ing through the lens of time, China’s de­vel­op­ment in many ar­eas has no equiv­a­lent in his­tory. More than 800 mil­lion peo­ple have been lifted out of poverty since the re­form and openingup pol­icy was launched in 1978. Peo­ple may ar­gue over the ex­act fig­ures, but not the fact that China has taken gi­ant steps.

How­ever, the two ap­proaches lead to en­tirely dif­fer­ent con­clu­sions and to­tally dif­fer­ent pol­icy rec­om­men­da­tions: West­ern an­a­lysts urge China to im­ple­ment re­forms and com­plain when this does not hap­pen fast enough. Chi­nese an­a­lysts re­spond that China is al­ready mov­ing for­ward very quickly, in­deed, faster than the West and that the gap is nar­row­ing.

What is, then, the cor­rect way to solve this dilemma?

The Euro­pean Union is im­ple­ment­ing new poli­cies aimed at more care­fully screen­ing cross-bor­der M&As car­ried out by non-EU in­vestors. The pol­icy aims at scru­ti­niz­ing both tar­gets and buy­ers.

On the tar­get side, it will list a num­ber of strate­gic in­dus­trial sec­tors and po­ten­tial ac­qui­si­tion tar­gets that will re­ceive more se­vere scru­tiny be­fore be­ing given the green light. On the ac­quirer side, more at­ten­tion will be given to who the ul­ti­mate share­hold­ers are. Should there be some for­eign gov­ern­ment in­volve­ment, the green light for the ac­qui­si­tion may be harder to come by.

There was no spe­cific men­tion of China, since the pol­icy is aimed at “any” ac­qui­si­tion by a for­eign en­tity, but there is the worry that, given the large num­ber of Chi­nese State-owned en­ter­prises, the flow of M&As orig­i­nat­ing in China may en­counter more re­sis­tance than be­fore.

One of the main wor­ries in Euro­pean cir­cles is that for­eign com­pa­nies may take ad­van­tage of the cur­rent eco­nomic cri­sis in Europe to sweep away all the best as­sets for a price that, while it looks rea­son­able to­day, may un­der­value the fu­ture prospects of the tar­get com­pa­nies, es­pe­cially un­der the new, stronger, for­eign share­holder.

Euro­pean politi­cians would be more re­laxed about sell­ing their com­pa­nies if there was some as­sur­ance that the new owner, for ex­am­ple a Chi­nese com­pany, were com­mit­ted to bring­ing new cap­i­tal into the com­pany thus in­creas­ing the pro­duc­tion level, cre­at­ing new jobs for the lo­cal pop­u­la­tion and grant­ing ac­cess to the Chi­nese mar­ket.

There is way to achieve that and it is a multi-step ac­qui­si­tion process.

In step one, a Chi­nese buyer would only ac­quire a mi­nor­ity stake, say 30 per­cent, of the tar­get com­pany. Over the fol­low­ing few years, the new owner should have ev­i­dence that the three ob­jec­tives men­tioned above have been ac­tu­ally met and only then, be al­lowed to in­crease its eq­uity stake, lit­tle by lit­tle, to reach full own­er­ship.

This would sat­isfy time-se­ries and cross-sec­tional anal­y­sis at the same time: The Euro­pean tar­get gets some money now and the Chi­nese buyer gets own­er­ship over time. Ev­ery­one should be happy.

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