The tidal wave of Chinese investment in the U.S. predicted by some and feared by others as a result of the record high number of transactions in the 3rd quarter of 2013 (and the over $14 billion record high Chinese investment in the U.S. for the year overall) has not materialized and is unlikely to, according to industry experts. In fact, China’s investment in the U.S. and around the world contracted in the first half of 2014.
Chinese investment trends are closely monitored by the Rhodium Group, which reports that China’s economic reform program is beginning to impact the country’s global investment profile, and while interest in U.S. assets continues to be strong, the industry focus is shifting towards real estate, advanced services and manufacturing.
According to their recent report, “Chinese companies spent $2.1 billion in the second quarter on investments in the U.S., and more than $10 billion worth of deals are currently pending. Notable is the recent increase in greenfield investments (foreign direct investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up) and growing average capital expenditures for such projects.
“Investment in U.S. real estate continues to boom as investors and developers are looking for risk diversification and new opportunities abroad. Economic reforms are also changing price structures for Chinese manufacturers, incentivizing greater investment in overseas R&D facilities, brands and local manufacturing capacity.”
While China accounts for only a tiny share of total foreign direct investment in the United States, the upward trend is clearly underway. Chinese firms, according to the Rhodium Group, operate in at least 37 of the 50 states and have investments across a wide range of U.S. industries.
The growth in Chinese FDI is met with mixed responses. Some are anxious about those investments stimulating job creation opportunities. Others are concerned about the real motive behind those investments. An IPO by the Chinese company, Alibaba, is expected on the New York Stock Exchange in the coming months. Alibaba is already bigger than Amazon and Ebay combined. What will their entrance into the domestic U.S. economy mean? Will they be competitive? Will they play “fair” and follow U.S. laws?
Should the U.S. be wary of FDI from China like Alibaba? Well, yes, to a very large degree. According the Heritage Institute, it is important to understand “state owned entities” (SOEs). It is unclear how much state equity participates in Chinese companies or the level of participation by China in their success.
The history of the rule of law in the People’s Republic of China (PRC) is very weak. While the private role of Chinese companies has surged since the spring of 2012, the bulk of large transactions still involve SOEs. Under Chinese law, while private firms exist, they exist to serve the PRC. If the central government orders a firm to break American law, that firm has no recourse.
It is estimated that 90 percent of investment in private firms in China comes from the state’s account. Protected from competition, SOEs receive substantial subsidies, free land and other advantages. Whether those foreign firms can compete in the U.S. is still to be determined. We do not know if they can adjust to a competitive marketplace and its rules and regulations.
It is incumbent on the U.S. to clearly and precisely maintain the rule of law for all American transactions and require that all enterprises obey American laws. The U.S. must constantly monitor the practices of these companies so that American security is not jeopardized. And, the U.S. must ensure that the Food and Drug Administration, the Securities and Exchange Commission, and other regulatory bodies closely monitor the behavior of Chinese firms that do business in the United States.
A Committee of Foreign Investment in the United States (CFIUS) has been established to monitor and protect U.S. interests. Operating under the Treasury Department, CFIUS is an inter-agency committee authorized to review transactions that could result in control of a U.S. business by a foreign person (“covered transactions”), in order to determine the effect of such transactions on the national security of the United States.
If we are to maintain our status as the most attractive marketplace in the world, we must expect, as well as seek, FDI in the United States. At the same time, we need to make sure the rules for economic activity are clear and that American interests are protected for the long-term success of our nation.