Theft warning for China investors

John Lee says some German and United States firms have expressed concern at the amount of intellectual property theft in China. Photo / Supplied

Any company with valuable intellectual property should be wary of entering a joint venture with a Chinese state-owned firm, a visiting academic says.

John Lee, an international expert on Chinese foreign policy from Sydney University's Centre for International Security Studies, has crossed the Tasman this week to speak at events hosted by the New Zealand Initiative, a libertarian thinktank formed through the merging of the Business Roundtable and NZ Institute.

At his presentation in Auckland on Tuesday night, he said China's state-owned enterprises (SOEs) dominated every sector of business in that country except export manufacturing.

Announcing its 2015 China Strategy in February, the New Zealand Government said this country would benefit from increased investment from Chinese firms, including SOEs.

Bright Dairy & Food Co, a subsidiary of China's state-owned Bright Food, invested $82 million to snap up a 51 per cent stake in Canterbury dairy processor Synlait Milk in 2010.

Lee said China's state-owned firms were sometimes ordered to follow "political directives".

"All intellectual property and know-how vested in an SOE in China is legally able to be accessed by the state and shared with other SOEs if deemed necessary to national interests," he said. "It is rare - it doesn't happen a lot - but it does happen."

If that sounded paranoid, Lee said, German engineering firms and American oil companies would confirm that the amount of intellectual property theft that had taken place was "of concern".

"One must assume that things like corporate information, trade secrets and intellectual property could be passed on by SOEs to Chinese Government agencies because Chinese law specifically allows that [to happen]."

Lee said up to 90 per cent of China's outbound investment was being made by SOEs and it was important to remember that such companies were essentially tools of the Chinese state.

Their top three executives were usually members of the Chinese Communist Party, he added.

"Around 50 of the 70 largest SOEs have a former government official in one of these top three positions."

Lee said that it was not possible to ban all foreign investment by such companies and a better approachwas to "treat investment by Chinese SOEs as if it were investmentby the Chinese state".

Lee has his detractors - you can find them in the comment sections that sit beneath his opinion pieces on the Financial Times and Wall Street Journal websites.

One member of the audience at Tuesday night's presentation - who claimed to be an uninvited, New Zealand-based representative of a Chinese state-owned firm - said during the question and answer session that Lee had painted a "terrifying picture" of China's SOEs that he did not agree with.

While China invested roughly US$60 billion internationally in 2010/11, the total stock of Chinese investment in this country was only $1.87 billion, according to a New Zealand Government document released this year.

"It's vital that all New Zealanders start looking at the big picture and how working with Chinese companies can be of mutual benefit," PricewaterhouseCoopers, which co-hosted Lee's talk in Auckland, said in a report published this week: "If people remain opposed to China investing in New Zealand, then they need to consider the broader impact and decide on the standard of living they want to enjoy and the future they think will be on offer for the next generations if we turn our backs on China now."

STATE OWNED
* Dominate all sectors of the Chinese economy other than export manufacturing.
* Up to 90 per cent of Chinese foreign investment being made by SOEs.
* 50 of the 70 largest Chinese firms have a former government official in one of their top three executive positions.
(Source: John Lee)