A decade ago it was virtually nothing. Now, annual investment by Chinese companies in the United States exceeds American investment in China. “Chinese outward investment is the mother of all global trends,” Thilo Hanemann, director of research firm Rhodium Group, said at a recent event in New York sponsored by the Columbia Business School Asian Alumni Club.
Between 2005 and 2014, Chinese FDI global totals grew tenfold, from $12.26 billion to an estimated $120 billion. Purchases by state-owned enterprises, which dominated in the early years, are now eclipsed by those from privately owned Chinese companies, which is responsible for two-thirds of current investment.
To be sure, other countries spend far more in the United States than China does. In fact, investment in the United States by China represents only .5 percent of the total US inbound investment flow. Still, the east-to-west trend is unstoppable, said Anthony Mak, who heads the Hong Kong Trade Development Council for the New York and Eastern US region.
Push and Pull
A loosening of Beijing’s restrictions on outbound capital has clearly aided the “push” side of the equation that has made China one of the world’s top five exporters of cash. Thanks to three decades of attracting outside money, “China holds the world’s largest foreign reserves,” noted Wei Jiang, director of Columbia Business School's Chazen Institute of International Business, who moderated the program. The country “clearly needs a well diversified portfolio” to balance its foreign exchange receivables, she said.
Declining opportunities at home have also spurred Chinese investors to look abroad. As real estate becomes a less attractive homegrown investment, and as labor becomes more expensive, foreign ROIs look relatively more viable to Chinese financial investors, such as Anbang Insurance Group. The nearly $2 billion it spent to buy the Waldorf Astoria earlier this year was reportedly the largest price tag ever for a single hotel property.
Mounting Chinese operational costs play into the “pull” part of surging FDI, too. Take the $218 million that Chinese textile company Keer Group has agreed to spend to build a cotton yarn production facility in South Carolina. “The price of raw cotton in the United States is 30 percent less than in China,” according to Mak. “Energy costs are lower in America. R&D is very strong. And the South Carolina government provides tax breaks like Chinese provinces did 20 years ago.”
Overseas greenfield investment such as the one by the Keer Group is a nascent trend. But the panel participants see more Chinese companies setting up shop in other countries as a way to secure overseas market share for their products. “China's consumer market is growing,” admitted Mak. “But the United States is still by far the biggest consumer market in the world. And goods made in the United States don’t have to pay tariffs.”
What’s for Sale
Energy and power investments made up almost half of all Chinese M&A in the US between 2005 and 2012, but recent deals are more diverse as private Chinese companies from a variety of industries join the M&A game. Big real estate purchases, such as the Waldorf Astoria acquisition, have made the headlines. But last year’s deal pipeline also saw major expansion into pharmaceuticals, biotechnology, agriculture, and food. These are all fast-growing sectors in China, and strategic buyers see their purchases as a way to buy quality control and best practices as well as brand recognition and market share.
Another area is entertainment and hospitality, a sector growing at 20 to 30 percent a year in China. “Buyers can take these figures to the banks to get financing for fast growing trends,” said Hanemann. A notable example comes from the Dalian Wanda Group, which bought AMC Theaters in 2012 and is reportedly interested in investing in production houses such as Lionsgate and Metro-Goldwyn-Mayer.
Finally, the most prominent slice of the M&A pie in 2014 was information technology. That sector, according to Rhodium, accounted for 48 percent of total Chinese FDI in the United States, boosted by Lenovo’s $2.9 billion purchase of Motorola Mobility.
Overcoming the Obstacles
Of course, Chinese investors entering the United States have also encountered roadblocks. John Reiss, global head of White & Case’s mergers and acquisitions practice, said the obstacles have more to do with psychology and culture than with restrictions from either the Chinese or US governments, though. As an international law firm, “our job is to teach clients whether the things they worry about matter,” he said, noting a number-one unfounded fear surrounds America’s proclivity to litigation. “We can tell you with 95 percent certainty that a board will get sued” when a merger is announced, he said. “But we also say with great confidence that this is not something to worry about.”
Similarly, The Committee on Foreign Investment in the United States (CFIUS) “is not to be feared, but respected,” Reiss said. CFIUS, which is headed by the Treasury Department but receives input from nine government agencies, decides whether a foreign buyer poses a national security risk. CFIUS oversight has resulted in some high-profile headlines but far less deal denial, said Reiss.
Reiss said negotiations more often fall apart due to lack of familiarity with American practices. For example, Chinese buyers may proceed too leisurely to bid in fast-paced auctions. “US buyers want price, speed, and a minimum of any post-close activity,” he said. As Chinese buyers become more familiar with US processes, panelists predicted, they will step up the acquisitions pace further.
FDI will likely be helped by continued nods of approval from both governments. “Now that foreign FDI is two-way traffic between China and the United States, leaders should take steps to eliminate investment barriers and enhance transparency so as to create economic benefits for their countries,” said Jiang.