# Goldman Sachs Helps China buy Foreign Companies

An episode of [Patrick Boyle On Finance](https://invisiblenetwork.ai/podcast/1547740313), 5 Sep 2023, 18 min.

Audio: https://anchor.fm/s/fc0914e0/podcast/play/92761838/https%3A%2F%2Fd3ctxlq1ktw2nl.cloudfront.net%2Fstaging%2F2024-9-8%2F387759604-44100-1-f87329c9fa72cc3d.mp3

Send us a textGet one month of complete digital access to the Financial Times for $1 by clicking here: https://subs.ft.com/patrick_boyle?segmentId=979ca37f-c690-7295-5eba-bf4ff33d3bb4Goldman Sachs is reported in the FT to have used a fund set up with Chinese state money to buy a series of US and UK companies, including one with a cyber security business that provides services to the British government, even as tensions rise between Beijing and the west.Goldman struck seven deals using cash fr...

## Transcript

[0:00] Hello and welcome you are listening to Patrick Boyle on
[0:03] Finance, a podcast exploring ideas from quantitative finance,
[0:08] examining events occurring in markets right now and financial
[0:11] history to see what lessons can be taken away, including
[0:15] interviews with some of the most interesting people in the world
[0:18] of finance. To learn more about the podcast,
[0:20] visit on finance.org. In 2014, the Chinese company and
[0:30] Bang Insurance Group, which at the time was described as one of
[0:34] China's most politically connected companies, bought the
[0:37] Waldorf Astoria hotel in New York City for nearly $2 billion.
[0:43] After the acquisition, the decadeslong tradition of US
[0:47] presidents staying at the Waldorf during their trips to
[0:50] New York City ended. President Obama stopped staying
[0:54] there, and the reason given was security concerns.
[0:58] The purchase of the iconic New York hotel was a symbol of the
[1:03] Chinese money flowing into the United States at a time when
[1:07] billions of dollars arrived in every year in the form of
[1:11] investments. The port of Antwerp.
[1:13] Bruges is the second largest port in Europe.
[1:17] And seven of the world's top ten chemical companies have their
[1:21] plans right there at the port. It's an important hub in the
[1:25] European economy and another example of China's strategic
[1:29] investments around the world. China Costco Shipping Company
[1:34] and China Merchants Group, both of which are stateowned
[1:37] multinationals, have a 20% stake in the container terminals at
[1:42] the port in Antwerp. And a 90% stake in its sister
[1:46] port of Bruges. Together with Hutchison Port
[1:50] Holdings, a Hong Kong company, they comprise the big players of
[1:54] Chinese investments across European ports.
[1:57] China's strategic investments in Europe go far beyond ports,
[2:01] though. They include electricity firms,
[2:04] wind and solar farms, airports and much more.
[2:08] Last year, the British government ordered China's wing
[2:11] tech technology company to undo its acquisition of Britain's
[2:16] biggest microchip factory more than a year after the deal had
[2:20] closed, citing national security concerns.
[2:23] This was the second Chinese takeover blocked by EU K's new
[2:27] National Security and Investment Act, which came into force last
[2:32] year after the business secretary had vetoed a Hong Kong
[2:35] based firm's acquisition of an electronic design company
[2:40] previously. It was the first retrospective
[2:43] rejection of a deal under the Act.
[2:46] The decision highlighted the increasing hostility to Chinese
[2:50] investment around the world, particularly in strategic
[2:54] sectors. In 2022, the Italian government
[2:58] blocked the sale of a military drone company, Alpie Aviation,
[3:03] following an investigation that the buyer, Mars Technology, was
[3:07] a shell firm of two Chinese stateowned enterprises.
[3:12] There's been a growing realization in recent years that
[3:15] investments have poured into critical sectors such as tech,
[3:19] energy, a I and cybersecurity, and that realization is now
[3:24] pushing governments to reassess their policies.
[3:27] The Financial Times reported in one of their most read articles
[3:31] of last week that the investment bank Goldman Sachs had used the
[3:35] funds set up with Chinese state money to buy a number of US&UK
[3:40] companies. Including LRQAA Company, whose
[3:44] subsidiary Netitude is a cybersecurity firm that provides
[3:48] services to the British government.
[3:51] Other deals include a tech startup that tracks global
[3:55] supply chains, a consultancy that advises on cloud computing,
[3:59] a drug testing company and a manufacturer of systems used for
[4:04] artificial intelligence, drones and electric vehicle batteries.
[4:09] Goldman Sachs had announced that it had invested in the
[4:11] companies, but it didn't say that the deals were financed at
[4:15] least partially using Chinese state funds.
[4:19] Goldman Sachs struck 7 deals using cash from a $2.5 billion
[4:24] private equity partnership fund. It's set up in 2017 with the
[4:29] sovereign wealth fund China Investment Corporation.
[4:32] Before we go any further, let me tell you about today's sponsor,
[4:36] the Financial Times, who's reporting this video is based
[4:39] upon. I'm really excited to be working
[4:42] with the FT as I've been a subscriber for over 15 years and
[4:46] I believe it to be an essential source of high quality news.
[4:49] While the FT is most famous for its awardwinning business
[4:53] reporting, the topics they cover are much broader than many
[4:56] possibly realize. They cover financial markets,
[5:00] economic news and have high profile interviews, the latest
[5:04] travel reviews, style news and much more.
[5:07] You can now get a one month trial subscription for just one
[5:11] dollar, giving you unlimited access to articles, columns and
[5:15] features on both desktop and mobile by clicking on my link in
[5:19] the description below. And now back to our main
[5:22] content. Around the world, Chinese
[5:25] companies are, whether fairly or not, viewed as instruments of
[5:29] the Chinese government. Mark Kennedy of the Wilson
[5:33] Center, a nonpartisan think tank, points out that the
[5:37] Chinese government has laws in place that allow the government
[5:40] to access information held by its citizens and corporations.
[5:45] Compatibility by the government to gain access to information is
[5:49] one of the reasons why people view the risk of dealing with a
[5:53] Chinese corporation similar to what they would view as the risk
[5:57] of dealing with the Chinese Communist Party or the
[6:00] government directly, according to Kennedy.
[6:03] Last year, a Chinese company bought land near an Air Force
[6:06] Base in North Dakota, causing an uproar.
[6:09] Although Chinese owned land is a tiny fraction of all foreign
[6:13] owned land in the United States, much smaller than Canadian owned
[6:17] land, its purchases have raised fears that the Chinese
[6:21] government could have controlled through Chinese corporations
[6:25] over US assets or gain access to US based information.
[6:30] Britain's former Prime Minister Boris Johnson two years ago
[6:34] announced that the British government would probe the
[6:37] Chinese acquisition of the country's largest chip maker on
[6:40] national security grounds. Data from UK authorities shows
[6:45] that since April of last year, more than 866 deals were
[6:50] referred to the government under the National Security and
[6:54] Investment Act, which allows politicians to call in
[6:57] acquisitions that could harm national security.
[7:01] More than 40% of the call in notices involved investments
[7:06] from China, the highest compared to any other nation, and UK
[7:11] ministers used national security powers to intervene in eight
[7:15] transactions involving Chinese linked investment in British
[7:18] companies in the past year, underlining their concern over
[7:23] the potential for Beijing to gain influence over vital
[7:27] industries. Similarly in Australia, a 99
[7:31] year lease on Port Darwin to a Chinese company came under
[7:36] scrutiny from the Australian Defense Department.
[7:39] Foreign policy analysts argue that Port Darwin would be a
[7:43] major military staging point in any regional conflict, including
[7:48] a clash over Taiwan. This is quite a sensitive issue
[7:52] in Australia, as while Australia and the US are close allies who
[7:57] warn of China's growing power and influence, from an economic
[8:01] perspective China is far and away Australia's largest trading
[8:05] partner, bigger than the next three combined.
[8:09] So what is the China Investment Corporation?
[8:12] Well, it's a sovereign wealth fund, and sovereign wealth funds
[8:16] are investment funds, usually created when governments have
[8:19] budgetary surpluses and have little or no international debt.
[8:24] This is often the case for countries that depend on raw
[8:27] material exports, and many have been established by oil rich
[8:32] states. CIC manages some of China's
[8:36] foreign exchange reserves. It was established in 2007 with
[8:40] around $200 billion of assets under management, and those
[8:45] assets have since grown to $1.3 trillion today.
[8:49] Institutional Investor magazine says that China's 4 biggest
[8:53] sovereign wealth funds, they do have more than one, are all
[8:57] amongst the world's top ten largest sovereign wealth funds,
[9:01] and that China continues to be the world's largest country in
[9:05] terms of sovereign wealth fund managed capital, making up 31%
[9:10] of the world's total. This chart from Toby Nangle, the
[9:14] former Global Head of Asset Allocation at Columbia Thread
[9:17] Needle. Shows the size of sovereign
[9:20] wealth funds and their Freedom House ranking.
[9:23] It can be found on his website, Principles with Principles.
[9:27] He argues that these funds are largely run for states with
[9:31] questionable human rights records.
[9:34] The FT article shows how private equity funds have helped
[9:38] sovereign wealth funds build up. Indirect holdings in companies
[9:42] in critical sectors at a time when governments have been
[9:45] paying more attention to the foreign ownership of strategic
[9:49] assets. Goldman launched the China US
[9:53] Industrial Cooperation Partnership Fund during Donald
[9:57] Trump's state visit to Beijing in 2017.
[10:00] Saying it would help address Washington's concerns about a
[10:04] trade imbalance between the US and China by investing Chinese
[10:08] capital in American companies, saying that CIC would be an
[10:13] anchor investor in the fund and play an active role in helping
[10:17] the companies it bought to expand in China, despite the
[10:22] deteriorating relationship between China and the countries
[10:25] where these assets are based. Goldman is alleged to have
[10:29] stepped up the funds activity, making 4 investments in 2021 and
[10:34] one last year. One of the more controversial
[10:37] deals occurred in 2021 when Goldman used the partnership
[10:41] fund to help finance its purchase of LRQA, the
[10:45] inspections and cyber unit of UK maritime classifications group
[10:50] Lloyd's Register. LRQA carries out inspection and
[10:54] certification services and operates in the aerospace,
[10:58] defense, energy and healthcare industries, among others.
[11:03] One of their subsidiaries is the cybersecurity company Netitude,
[11:07] which says on its website that it's an approved service
[11:11] provider for the UK government, and that it helps to strengthen
[11:14] government and defense organizations around the world.
[11:18] Its work includes ethical hacking, in which its staff
[11:22] attempt to hack client systems to assess their vulnerabilities.
[11:26] In this deal and others, the Goldman China Investment
[11:30] Corporation fund invested alongside separate private funds
[11:35] that the bank also manages, meaning that the Chinese state's
[11:38] financial involvement was overall relatively small.
[11:42] However, CIC does tend to be much more closely involved with
[11:47] the companies it buys than typical investors in most buyout
[11:51] funds are. CIC is listed on the Goldman
[11:54] Funds Limited Partner Advisory Committee, a term used in
[11:58] private equity for a group of fund investors who might be
[12:01] consulted for advice even if they don't make any final
[12:05] investment decisions. One of the pictures a company
[12:08] gets in taking investment from a fund like this.
[12:12] Is that they'll get help in accessing the Chinese market.
[12:16] A spokesman for LRQA told the FT that China represents 40% of the
[12:22] global certification market and that they are currently
[12:25] underrepresented there, which is something they are seeking to
[12:29] address in part with assistance from the fund.
[12:33] The spokesman said that Netitude had no business in China and has
[12:37] no plans to set up there and had no interaction with CIC.
[12:42] Goldman told the FT reporters that the cooperation fund is a
[12:47] US fund run by a US manager and he's managed to be in compliance
[12:52] with all laws and regulations. It continues to invest in US and
[12:57] global companies, helping them increase their sales into the
[13:01] China market. A UK official told the press
[13:05] that the British government could not comment on any
[13:07] specific acquisitions, but that the government would not
[13:11] hesitate to use their powers to protect national security where
[13:15] they identify concerns. The funds involvement with a
[13:19] number of these investments had already been reported to the
[13:23] press back when the acquisitions took place, but five of the
[13:27] investments had not been made public.
[13:30] The fund does have other investors outside of CIC too.
[13:34] For example, the Minnesota State Board of Investment confirmed
[13:38] that they were also investors in the fund.
[13:41] Goldman Sachs is not the only investment manager to run
[13:45] bilateral funds like these that CIC sets up with international
[13:50] asset management firms to strike deals in their home countries,
[13:55] helping China to increase its exposure to Western companies.
[13:59] Rhodium Group, A think tank, runs the China Investment
[14:03] Monitor website, which collects data on Chinese direct
[14:07] investment in the United States by year, industry sector deal
[14:11] type and government ownership. Their data shows that in 2016,
[14:16] Chinese investment into the United States hit a high,
[14:20] peaking at nearly $46 billion. European Commission data shows
[14:25] that investment flows from China into Europe reached a peak of
[14:29] almost €60 billion in 2017 after that investment began declining,
[14:36] reversing the overall trend. This doesn't appear to have been
[14:40] driven by the election of Donald Trump, although it may have had
[14:43] some effect because similar declines began in Europe and the
[14:47] rest of the world all at the same time.
[14:51] International acquisitions by Chinese firms fell from around
[14:55] $200 billion in 2016 to $36 billion by 2020, a big decline.
[15:03] cross-border lending, mostly to poor countries, by some of
[15:06] China's state banks, similarly stopped growing.
[15:10] The drop off more than anything else is due to tougher
[15:14] restrictions in China on capital outflows that were put in place
[15:18] in 2017. The Chinese government had grown
[15:22] increasingly concerned. The Chinese businesses and
[15:25] Chinese individuals were moving too much money abroad and out of
[15:30] reach of the government. So through various means, the
[15:33] Chinese government clamped down on money leaving the country
[15:37] with capital controls and encouraged their firms to bring
[15:40] back some of the money that they had sent abroad.
[15:44] The reduction is also due to tougher US and European
[15:48] screening measures for foreign investments and heightened
[15:52] political tensions, especially between China and the United
[15:56] States. While Chinese companies have
[15:59] significantly scaled back their international investments in the
[16:02] last few years, they are still a big investor around the world.
[16:07] They've run into accusations of neocolonialism in the past when
[16:11] making strategic investments through the Belt and Rd.
[16:14] initiative in the 20 Tens. Some high profile purchases,
[16:19] like Volvo and the Waldorf Astoria reminded some of Japan's
[16:23] corporate conquests in the 1980s.
[16:27] The centralized nature of China, where all of the big decisions
[16:31] are made by a small group of people, make international
[16:35] governments nervous. The fear is that the same person
[16:38] could be making decisions on military actions, geopolitical
[16:42] maneuvers, the economy, trade and investment.
[16:47] The deals disclosed in the FT article highlight how private
[16:51] equity funds might help sovereign wealth funds to build
[16:54] up holdings in strategic sectors, which are off the radar
[16:58] of governments who have been increasing their scrutiny of
[17:01] foreign purchases of key assets. It's likely that these deals
[17:05] will draw greater attention going forward.
[17:09] Thanks for tuning into this week's podcast.
[17:11] If you found it interesting, forward a link over to a friend
[17:14] as that's how podcasts grow just through word of mouth like that.
[17:19] Don't forget to check out our sponsor, The Financial Times,
[17:22] using the link in the show notes.
[17:24] Have a great day. Bye.
[17:26] If you enjoyed this episode, be sure to subscribe so you're
[17:30] notified when a new episode is posted.
[17:32] Thank you to everyone who is supporting this content on
[17:35] Patreon. If you enjoyed this content, you
[17:37] can find more like it on YouTube, on the Patrick Boyle on
[17:41] Finance channel or follow us on Twitter.
[17:44] Patrick Eboyle, thanks for listening.
[17:46] Bye.

Shows are listed from Apple Podcasts' charts and directory, and Podcast Index where it is used. Every show and episode belongs to its publisher and plays from the publisher's own feed; this site hosts none of them.