Why Did the PRC Buy These Businesses?

The Wall Street Journal‘s Joseph Sternberg ran an op-ed the other day wondering whether the People’s Republic of China might be playing a risky game of “greater fool” in buying up failed or failing companies in the expectation of finding a greater fool to whom to sell these, later.

Mr Sternberg makes some interesting points, and his piece should be read in its entirety.  But I think he may be misreading the PRC on this; I think he’s making the same mistake here that the Obama administration is making about Iran and the usefulness of sanctions: each thinks these others—the PRC and Iran—think like we do.

They do not.  Their pain buttons are not the same as ours, their goals are not the same as ours, and so their motivations cannot possibly be like ours.  Sternberg cites two of the PRC purchases—the car battery maker, A123, and the Canadian oil and gas company, Nexen, for each of which the PRC paid large premiums, as his examples of the potential for the PRC finding itself at the end of the greater fool chain.

These are, indeed, useful examples for Sternberg’s points; consider, though, an alternative set of goals for the PRC’s acquisitions.  The PRC bought a controlling stake in A123 not for the car battery technology, but for the battery technology.  The PRC has, for instance, a burgeoning space program.  They have a desire to expand, generally and massively, into the solar power realm for a variety of reasons, and power storage is critical to both.

The PRC bought a controlling stake in Nexen, not because they think they can manage the company better than the incumbents but for Nexen’s Canadian oil and gas assets.  Recall that the PRC also has a burgeoning physical industry and transportation functionality that need copious quantities of oil.  Also, oil that the PRC controls is oil that the US does not.  Hormuz need not be the only bottleneck in our access to oil.

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