China blocks Coke deal: Too much juice

Which matters more: the flow of capital across borders or the flow of juice to consumers’ lips? The latter looks to be the unfortunate choice China has made by blocking Coca Cola’s $2.4bn purchase of domestic juice-maker Huiyuan. Without a convincing explanation as to how the deal would hamper competition in the country’s booming beverages business, the decision looks like blatant protectionism.

Shielding local companies - and perhaps the influence of the Chinese government apparatus - from the muscle of a foreign multi-national erects yet another unwelcome hindrance to the global movement of capital. China would, of course, not be alone in such endeavours. US lawmakers in 2005 managed to convince China National Offshore Oil Company to drop its bid for US oil group Unocal, citing largely spurious concerns over Unocal’s strategic importance.

While orange juice is hardly as geopolitically significant as oil, blocking Coke after seven months of deliberations may just be a delayed opportunity for the Chinese government to settle the Unocal score. But it comes at an inopportune moment. The global financial crisis has given birth to all manner of impediments to free trade and capital flows.

This has happened despite one lesson of the Great Depression - that restricting global trade and capital flows fails to produce greater prosperity, and in fact probably achieves the opposite. The US Smoot-Hawley Tariff Act of 1930 sparked retaliation from America’s trading partners, led to misallocation of capital on a global scale and threatened to bring international trade almost to a halt.

Putting the lid on a relatively small orange juice deal is hardly a new Smoot-Hawley Act. But without the evidence to back up its claims that a Coke-Huiyuan deal would limit competition, it sends a poor message. The deal, which would have given the group 21% of the market for fruit and vegetable juices, would have been the largest-ever complete takeover of a Chinese company by a foreign entity.

So while the Huiyuan decision may not presage a global M&A shutdown, it doesn’t help acquisitive Chinese companies. Chinalco, for instance, is still trying to convince the Australian government to permit its purchase of a $19.5bn stake in Anglo-Australian miner Rio Tinto. They may not care much for Coke in Canberra, but the US drinkmaker’s slap-down in China won’t go unnoticed.