Yonghui Superstores is a major player in China’s retail sector.

Since April, the grocery chain with more than 500 outlets has been finalizing a 559 million yuan (US$83.2 million) deal to increase its stake in state-backed retailer Wuhan Zhongbai Group to 40%.

At first glance, there was nothing unusual about the move. But now, there appears to be a snag.

Hong Kong perennial Jardine Matheson, the sprawling British conglomerate, holds roughly a 20% stake in the majority Chinese-owned Yonghui through its subsidiary Dairy Farm International. And last week, the unexpected happened.

“[The National Development and Reform Commission or] NDRC asked Yonghui to file for a foreign investment security review and to submit supplementary documents,” Trivium China, the research and analysis firm based in Beijing, reported.

“A national security review framework for foreign investments has existed on paper since 2011 – and it was officially enshrined in law in March. But retail businesses are not usually seen as national security threats [while] Yonghui is only seeking a 40% stake in Zhongbai – not majority ownership,” it added.

In the broader context of the world’s second-largest economy, this has major implications.

Premier Li Keqiang has constantly reiterated the mantra that China is open for business and will deepen reforms allowing foreign companies increased access.

He has also promised to cut red-tape and end what the European Union Chamber of Commerce in Beijing has called “promise fatigue.”   

“Reform and opening-up, as well as technology innovation, are significant to the world economy,” Li said at the Summer Davos Forum in Dalian. “China is determined to deepen reform and opening-up.”

Trade tensions

His comments were significant amid rising trade tensions between China and the United States and growing uncertainty about the state of the global economy.

The fallout from the merry-go-round of tit-for-tat tariffs has added to the country’s domestic problems.

At the weekend, anxieties increased as Beijing and Washington escalated the conflict, hitting each other with a jump in import duties.

The move came 10 days after the National Bureau of Statistics revealed that Chinese factory output had plummeted in July to its lowest level in 17 years.

Retail sales have also suffered after rising just 7.6% in June as consumers started to feel the pinch, while sluggish imports have been squeezed by the domestic downturn, exasperated by the Sino-US row.

Even industrial profits declined 1.7% between January to July compared to the same period in 2019, despite rising 2.6% last month from a year earlier.

Moreover, tremors have been detected in the global economy after the International Monetary Fund issued a stark assessment.

“Higher bilateral tariffs are unlikely to reduce aggregate trade imbalances, as they mainly divert trade to other countries,” a blog entitled Taming the Currency Hype and written by IMF researchers warned.

Another ominous omen has been the upheaval in Hong Kong after two months of protests by the pro-democracy movement.

China’s state-run media has mounted a concerted campaign in the Special Administrative Region, calling on companies to “fire employees found to have the wrong stance on the situation.”

Rupert Hogg has already resigned as CEO at Cathay Pacific in the face of Chinese pressure after staff from the airline took part in the demonstrations.

Now, international accounting firms, such as PwC, Deloitte, KPMG and Ernst & Young, or EY, are in the spotlight.

A group of anonymous employees from the ‘big four’ paid for a full-page ad in the Apple Daily newspaper on Friday.

“We will never fear or compromise with injustice and unfairness,” the ad read.

‘National sovereignty’

In response, PwC issued a statement, insisting that the ad did “not represent the firm’s position.”

“We firmly oppose any action and statement that challenge national sovereignty,” it added.

Against this backdrop was the decision by the National Development and Reform Commission to apparently intervene in a standard business deal between Yonghui Superstores, which is ranked 93rd in China’s Top 500 private enterprises, and Wuhan Zhongbai.

So far, the NDRC has released no further information. As a macroeconomic management agency, it answers only to the powerful State Council, which has administrative and planning control over China’s economy.

Still, last week’s news was baffling since the Wuhan Zhongbai investment was announced in an April Shanghai Stock Exchange filing.

“Jardine Matheson executive chairman Ben Keswick was named chairman of Yonghui Superstores in December last year, and this latest transaction comes less than six months after Yonghui formed a $1.2 billion joint venture with a unit of CK Hutchison Holdings and Tencent, which was already a shareholder in the grocery retailer, to expand the company’s Greater China footprint,” Mingtiandi, which specializes in Asia real estate intelligence, stated at the time.

On Monday, Jardine Matheson told Asia Times it had “no comment to make” about the foreign investment security review.

Yet since the April decision, Yonghui has announced plans to set up a joint venture with Beijing-based artificial intelligence startup 4Paradigm in another filing with the Shanghai Stock Exchange last week.

For now, there must be a question mark against whether that gets the go-ahead.

“Murky enforcement of the security review process is a good way to scare off foreign investment,” Trivium China said in regards to the Wuhan Zhongbai conundrum. “In fact, if Yonghui is a harbinger, FDI could be severely restricted … [and] that doesn’t strike us as being aligned with other policy priorities – namely, a strong push to attract foreign investment.”

Indeed, that would spark a chain reaction the global economy could well do without.