In the first test of an anti-monopoly law, Chinese regulators announced that they would not allow US based Coca-Cola to buy China Huiyuan Juice Group Ltd., which controls 40% of the Chinese juice market. The takeover attempt valued China Huiyuan Juice Group Ltd at a whopping $2.3 billion.
A New Law
Chinese regulators cited a seven month old law to block the takeover by saying that an acquisition by Coke would limit competition in the juice industry. That might have been a bold statement in this economic climate, as the juice maker controls a minority stake of the overall drink business.
Rough Times in China after February Surplus Falls 90%
The world fears that countries may turn to protectionism or nationalism amid an economic slowdown. Though China has been unstoppable in its purchase of foreign assets, it was unwilling to let a US company take over a Chinese firm, which is interesting to investors to say the least. This comes just after China reported a tiny $4 billion trade surplus in the month of February, which is off by more than 90% from January's trade surplus.
Trade Surplus Hurts US Debt Auctions
The biggest creditor to the United States, China is without a huge surplus of foreign capital each month. This is important news for the US Treasury market, which is pushing through record sized treasury auctions in order to finance next year's $3.5 trillion budget. The Federal Reserve has already countered the lack of Chinese funds by quantitative easing measures designed to keep treasury rates low and the treasury budget balanced – or as balanced as debt laden can be.
G20 Meeting Set to Fire up Global Tensions
The G20 meeting on April 2 will be paramount in the economy going forward. Before the meeting, China has made numerous calls to the US to defend the value of the dollar and joined in with Russia to call for a new global reserve currency. To other nations, the US dollar isn't good enough any longer; instead, a global solution needs to be made so that the whole world is not banking on the economy of the United States. China has suggested that Special Drawing Rights in the IMF be used to create a new basket of currencies, rather than just the US dollar, to defend wealth around the world.
The United States can't sit back and let the US dollar fall by the wayside. Chances are the discussions between G20 figureheads will create a global stir at the very minimum. The United States enters in a distressed setting; the US has been borrowing for years, the dollar has crumbled in value against other currencies, and it lacks the economic firepower to fight against a change in the world's reserve currency.
Protectionism is Back
The Coke deal was just one of many in the future that will likely be denied. As the world's countries begin protecting their own interests before allowing international commerce, investors should expect that international takeover bids will be rejected. Should the merger scene fire up with the economy, expect more failed mergers and even greater tensions between world’s economic powers.