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China tech

Deal breaker? China nationalizes strategic tech with eye on US

Beijing takes control of 44 companies despite Washington pressure in trade talks

Meiya Pico, a Chinese digital forensics and cybersecurity company, has come under state control. (Photo from the company's website)

BEIJING -- China is taking throngs of high-tech companies under its wing to prepare for a protracted standoff with the U.S. despite calls from Washington to step back from the business sector.

The two countries signed a "phase one" trade deal Wednesday, but deferred thorny topics like intellectual property protections and Chinese state subsidies for a second round of negotiations expected to start soon. The nationalization of high-tech companies could become a potential roadblock in the so-called phase two talks.

A total of 165 listed Chinese companies changed ownership in 2019, roughly 60% more than the year before due to China's economic slowdown, according to the China Securities Journal, a newspaper backed by the state-run Xinhua News Agency.

Of those that changed ownership, 44 companies, with a combined market capitalization of about $36 billion, were acquired by state-owned companies or government-run investment companies. Many were involved in highly strategic fields like surveillance and information systems.

The largest on the list, with a market capitalization of about $2.3 billion, is Xiamen Meiya Pico Information. The company, which was put on a U.S. trade blacklist in October, works with law enforcement officials in digital forensics and online censorship, and is now under the control of the state-owned State Development & Investment Corp.

Shenzhen Infinova, bought by a Shenzhen government investment company, produces items like surveillance systems for law enforcement. Its products have been sold to over 100 countries, including in North America and Europe.

Another surveillance system provider, NetPosa Technologies, was acquired by Sichuan Province's investment arm.

The trend extends beyond security-related businesses. Shenzhen Yinghe Technology makes production equipment for lithium-ion batteries, which is one of the industries promoted under President Xi Jinping's "Made in China 2025 initiative. Yinghe was bought by state-owned Shanghai Electric Group.

Ygsoft, which makes artificial intelligence-driven software for the power industry, is now under the State Grid Corp. of China.

China's regional and other governments have raised about 500 billion yuan ($72.7 billion) since late 2018 to rescue struggling private-sector businesses, 86 billion yuan of which had been used by the end of June 2019, local media reported.

But only 11 of the 44 recently taken over by state enterprises were in the red in 2018. Meiya Pico's net profit increased 10% that year on a 20% jump in revenue, while Infinova and NetPosa logged a 50% and 20% sales increase, respectively.

Chinese Vice Premier Liu He and U.S. President Donald Trump signed a "phase one" trade deal between the two countries on Jan. 15, but shelved thorny issues such a Chinese state subsidies.   © Reuters

The government likely picked these companies to protect them amid the growing technological rivalry between China and the U.S. The administration of U.S. President Donald Trump has been targeting Chinese tech companies through tariffs and embargoes, concerned that they could challenge the U.S. in new, strategic fields.

Private-sector companies are a main driver of the Chinese economy, accounting for more than 80% of the country's employment and more than 60% of gross domestic product, according to the All-China Federation of Industry and Commerce.

But they were outperformed by state-owned compares for the second straight year. Private companies earned 1.59 trillion yuan in profits in the first 11 months of 2019, less than the 1.6 trillion yuan by state-owned companies, based on data from the National Bureau of Statistics.

The nationalization of private tech companies "is one of the Communist Party's support measures," a regional government official said.

Not all see it as a positive development. "The government is strengthening its grip over private-sector companies and pressuring them," said one financial executive.

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