Chinese companies are buying up U.S. companies and other assets at a record pace in 2012. The country is spending some of its huge dollar holdings before they depreciate, while acquiring — in addition to hard assets in the U.S. — the market share, technological know-how, talent and training expertise that often come with them.

In the past, China’s designs on acquiring U.S. companies have hit strong resistance on national security grounds. Last year, for example, China’s largest telecommunications equipment company — Huawei – voluntarily walked away from its acquisition of 3Leaf, a U.S. server technology company, under pressure from the U.S. government. The U.S was concerned about Huawei’s connections with Chinese security services (the company was founded by a People’s Liberation Army soldier), though Huawei said it had no connections with the Chinese government. Earlier attempts by Huawei to buy a network company — 3Com Inc. — and to sign a contract with Sprint Nextel worth billions of dollars were also turned aside over national security concerns in the U.S. In 2005, the U.S. nixed efforts by the Chinese oil giant CNOOC to buy up UNOCAL, a U.S. oil company.

To shed some light on the latest run at U.S. companies by Chinese firms, Knowledge@Wharton asked two Wharton management professors to offer their thoughts on Chinese acquisitions and the potential for a U.S. backlash. They are as follows:

Marshall Meyer:  

I view the [potential U.S.] backlash (as in UNOCAL-CNOOC) as idiosyncratic and unpredictable. Step back from particular acquisitions — or the number of acquisitions — and ask how the U.S. public views Chinese economic strength.

First, the public believes that China is stronger economically than the U.S. (we used to believe Japan was stronger).

Second, U.S. public opinion is not particularly apprehensive about growing Chinese economic strength — we’re more apprehensive about growing Chinese military strength.)

Third, there is little or no partisan divide on attitudes toward Chinese investment in the U.S.  Democrats are prone to bash China on jobs, of course; Republicans will bash China on national security issues. Within the parties, especially the GOP, there are deep fissures on China. The Cato Institute, for example, wants open markets, while The Heritage Foundation tends to see “other-than-market” considerations driving Chinese acquisitions in the U.S. Rick Perry embraced the Hauwei investment as part of his “Texas miracle” program, and was bashed by the far, far right for his stance on Hauwei.

China rebuilt the port of Boston and no one peeped. But when a Chinese company proposed to acquire a U.S. petro firm whose assets were mainly in Asia, Congress reacted. The difference is public relations: COSCO (the Chinese shipping company that built the port) had deep experience lobbying the Congress, while CNOOC (the Chinese oil company) at the time did not. CNOOC has since gotten wiser and is utilizing top lobbyists in its current push to acquire the Canadian energy giant Nexen. But Canada’s right wing is pushing back on China, and it isn’t clear where this will end up.

China needs to spend their foreign reserves before they depreciate. But they cannot spend these reserves domestically without pushing the renminbi upward. Hence, China’s investment goes outward. The reaction [in the U.S. and elsewhere] is driven by whether the motive is interpreted as financial or “other than market.”

There are some U.S. companies starved for cash who turn to China, for example, in auto parts where Wanxiang (China’s largest auto parts maker) is buying a lot.  Equally important, there are Chinese companies wanting to diversify outside of China due to the inherent risks at a time of government transition, and that will pay premium prices for the privilege. (I cannot find another explanation for Beijing Oceanwide Realty’s investment in Lenovo’s parent company, Legend Holdings.) But don’t imagine that all Chinese companies go out from strength. Often it is from weakness. Or fear. It’s a complicated story.

 Mauro Guillen:

China holds a large proportion of outstanding U.S. government bonds. [This is] because they have a large amount of foreign currency reserves. Chinese companies would also like to buy other types of assets, especially those [that provide] access to market share, technology or other resources in the U.S.

There are several policy issues here. First, the U.S. is committed to free capital flows, so curtailing foreign investment in the form of M&As carries costs.

Second, having said that, the U.S. should be concerned if the acquirers are foreign state-controlled companies, no matter the country of origin. This is especially true for “national security” industries.

Third, we should get used to this type of headline. More and more Chinese firms, and firms from emerging economies in general, will engage in M&As in Europe and the U.S.

Reports about European bank fragility in the so-called “periphery” have picked up. Last week, Moody’s cut ratings for the deposits and long-term debt of 16 banks in Spain between one and three grades as customers increased withdrawals. In Greece, unsurprisingly, the pattern was even more pronounced – people increasingly were withdrawing their bank deposits. New terms are being coined for the significant level of bank withdrawals – such as a “slow-motion” bank run or a “bank jog.”

It’s an ominous development to those worried about a runaway-train dynamic with Europe’s banks. For all of the thorny problems facing European officials, and for all of the financial instruments and lending programs they continue to deploy to try to solve them, one problem could trumps all others: a market panic in which events move so fast that officials, no matter how well intentioned, simply cannot move fast enough to stop a huge, new financial meltdown that might quickly spread globally.

For now, the relatively slow-moving speed of the withdrawals has kept the anxiety in check. Wharton management professor Mauro Guillen says that, on balance, “my sense is that a run on the banks is very unlikely, except for Greece, where the risk of an exit from the Eurozone remains high.” He adds that his information is based only press reports, however.

Wharton finance professor Franklin Allen, meanwhile, is surprised at how “slow people have been to withdraw money from Greek, Spanish and Italian banks. This is particularly true in Greece. My understanding is that only about a third of deposits have been removed so far,” less than might be expected given the gravity of the situation. “For Greece the likelihood of an exit is generally estimated to be high. Probably people will lose half the value of their money relative to withdrawing now and putting it in a German bank. If people do figure this out … it will be over quite quickly. I don’t think they (officials) will be able to put in place what they need to stop it in time.”

Since there are huge doubts over whether national governments, in Greece or Spain, would have enough resources to overwhelm a full-scale bank run, the question becomes: What is the next line of defense for Europe? Until now officials have tapped various funds to support banks and sovereign debt, such as the European Financial Stability Facility the European Stability Mechanism and the Long-term Refinancing Operation. But much of that money is exhausted. And the European Central Bank (ECB) by treaty cannot be used right now as a bank of last resort.

“Each country has the equivalent of the FDIC,” Guillen notes. “That’s the first line of defense. Governments could also take over a bank if it becomes the target of a bank run. Right now, there is no European-level mechanism.” Guillen thinks that it is increasingly likely “that only eurobonds will eliminate for sure the Greek risk of exit. But we need to wait until next month’s election to see how the situation changes after that.”

Eurobonds, which would spread bailout liability among all eurozone members, are being pushed strongly by France’s new president, Francois Hollande. Yesterday, however, German officials again strongly reiterated their opposition to such common bonds. If ever issued, the bonds would help reduce financial pressure on the countries in the eurozone that are struggling with debt and recession, but would raise borrowing costs for Germany, which can borrow practically for nothing right now. Yesterday it sold 4.5 billion euros worth of two-year bonds at an unusually low interest rate of just 0.07%.

Germany’s strong opposition was restated despite newfound support for Hollande’s position from the International Monetary Fund and the Organization for Economic Co-operation and Development, two of the top global economic organizations.

“The problem is that these solutions, especially things like fiscal union will take a significant time to implement,” says Allen. ”This is their problem at the moment.” The same is true for eurobonds. “Again, this will take a long time to put in place safeguards in terms of controlling expenditures, even if the Germans were to agree. However, I don’t think they will. They are gradually being sucked in further and further in terms of their exposure.”

Allen added that “we are getting closer to a bad outcome occurring. Maybe they will save it this time, but before too long something must change drastically if we are to avoid it.”

The negative evidence has been piling up, say critics of the strict austerity imposed on many European countries to force budgetary and economic reforms. While those reforms are intended to usher in more sustainable growth eventually, today several European economies are slipping back into recession (Spain, Italy, Portugal, Ireland, Greece and the UK).

It’s evidence that policies that might work over the long term can have devastating consequences in the short term if they are jammed in over too-short a period, critics contend. But what has most turned the screw on austerity views are two recent developments that sent political tremors across the continent.

First, Mark Rutte, the Prime Minister of the Netherlands, resigned after a collapse in talks over the country’s budget, which included deep cuts. The resignation followed a refusal of far-right leader Geert Wilders to agree to some 16 billion euros of budget reductions as part of an austerity package. And second, in France, incumbent President Nicolas Sarkozy looks likely to be bested by Socialist challenger Francois Hollande, who strongly advocates a watering down of austerity measures in France and in Europe more generally. Hollande says he has support throughout Europe for a plan that would encourage more economic growth measures.

Hollande says he will not sign on to Europe’s fiscal-discipline treaty unless it is retooled to include a package of growth measures. As it stands, the European Union austerity budget treaty signed in March would send the continent into a deep recession, he argues. If he wins this Sunday’s election, as looks likely, Hollande vows he will offer ideas on how to recast the treaty the following day.

The bottom line is that politics is pushing back strongly against economic policies of austerity in Europe.

Wharton finance professor Franklin Allen calls the political developments significant. “Let’s see if Hollande wins on Sunday. If he does, then this may well impact what happens in elections Ireland on May 31 and in the Netherlands in September. I think Greece’s outcome on Sunday will also be interesting.”

As many European countries slip back into recession, there are signs of a shift to “those of us who have argued for economic growth first and a gradual fiscal adjustment,” says Wharton management professor Mauro Guillen. “We all hope now that the fiscal hawks realize that their strategy is not working.” But any meaningful pivot away from austerity and toward more stimulus “will only happen if GDP continues to shrink or grow very slowly. But then, I am not wishing for that.” In any case, expect strong headwinds for global firms in Europe.

Guillen adds that the best outcome “would be for governments to commit to fiscal balance over a period of three to four years, giving time for the economy to recover, tax revenue to increase and so on. But the problem is that the markets don’t believe the politicians’ commitment to fiscal austerity years down the road. They believe that if they reduce the pressure now, the politicians will relax.”

Allen thinks changes in Europe’s austerity stance are likely, at least in Spain, Italy and France (if Hollande wins).

But what will that change look like? “The problem is there are no good answers to this question,” Allen says. “If we rule out Keynesian demand stimulation, then product market reforms are the fastest acting.  But these are still measured in years. Labor reforms [take] a decade and education is even more.  The fastest is exchange rate changes. These act within months. This is why, in the end, I think it would be better if Greece, Portugal and Spain temporarily left the Eurozone.”

In Allen’s view, any shifts from austerity to more growth-oriented policies will be modest and likely slow to bring any change.