Non-Treasury Chinese Investment In the U.S. Headed to $100 Billion
The American Enterprise Institute-Heritage Foundation China Global Investment Tracker follows Chinese investment all over the world. Through June 30 2014, and excluding China's gigantic holdings of American treasury bonds, the U.S. had received over $70 billion in Chinese investment. This is the most of any country, and much more could be on the way.
What Has Happened
Chinese (non-bond) investments in the U.S. range from minority stakes in large financial enterprises, to outright purchases of small medical companies, to the building of office towers in major cities. Last year saw a record amount of such investment, a record which may be exceeded this year. Besides the rising amount, other prominent trends have been increasing diversification by state and by industry as well as a much greater role for China's private sector.
The timeline for Chinese investment shows ups and downs. Investment in the U.S. was essentially zero in 2006, after Congress blocked China National Off-Shore Oil's $18 billion acquisition of Unocal, largely because American firms could not (and cannot) buy Chinese oil companies. Altogether, almost $40 billion of Chinese transactions in the U.S. have failed for non-market reasons such as government interference.
From 2007-2010, most Chinese investors were lured in by the financial sector, with the purchase of small stakes in financial companies based in New York City as the chief activity. Those which bought high -- pre-Lehman collapse -- suffered badly but those that bought low in 2009, led by sovereign wealth fund China Investment Corporation, did quite well.
In 2011, the U.S. blocked -- on national security grounds-- multiple acquisitions by Chinese telecom Huawei, which complained fairly loudly. Other Chinese firms shied away as a result and investment plummeted below $3 billion for the year. The fallout was temporary, though, as the last two and half years have seen 50 transactions of more than $100 million each and Chinese investment averaging over $1 billion every month.
By state, New York is still the overall king in terms when it comes to receiving funds. However, in the bull run since 2012, Chinese investors have been more active in California and Texas than New York. And the biggest single investment has been in Virginia - the $7.1 billion spent in 2013 to acquire Smithfield Foods.
As New York has become less important, so has finance. The technology sector has been the leading recipient thus far in 2014; in 2013 it was agriculture and real estate. It is too early to judge agriculture and technology purchases but several of the real estate ventures look overly ambitious, reminiscent of what Japanese buyers did 25 years ago. There have been multiple large investments in shale over the past few years, chiefly minority stakes in fields. Transportation trails the other sectors in drawing investment but has seen the first large Chinese construction contracts.
A final statistical development may be the most important: around the world, state-owned enterprises account for about 90 percent of the value of Chinese investment. In the U.S., that number is about 65 percent. Moreover, the state's share has flipped since the beginning of 2011 -- almost 65 percent of the Chinese investment in the U.S. since then has been by non-state entities.
What Will Happen
The remainder of 2014 and 2015 could see over $20 billion in fresh Chinese spending. About half of U.S. states, including Florida, Washington, and Indiana, have seen no large Chinese transactions. That's the equivalent of a large country which remains untapped and it's a situation that seems unlikely to last. Many governors have already taken trips to China to seek investment, offering an easy path for their later-arriving colleagues to follow.
One way absent states can join the party is through construction contracts. In the U.S., Chinese firms have thus far won only a few construction and engineering contracts, chiefly for roads in New York and New Jersey. Around the world, though, Chinese infrastructure firms such as Sinomach are the dominant players. If they can be commercially competitive in this country, many states will see Chinese builders as attractive options for enhancing highways, ports, and light rail. American companies will also consider them intriguing partners in constructing industrial plants.
Another area of potentially explosive growth is energy. Chinese oil and gas companies are now much more savvy, experienced investors than CNOOC was in 2006. The next $15-20 billion attempted energy acquisition will certainly generate political opposition here but will also be well handled in terms of public relations by the Chinese side and may ultimately go through. A key factor will be how Chinese investor Shuanghui handles Smithfield, the largest successful deal to date, both in terms of following American laws and the number of people employed.
A drawback of competitive Chinese bids for construction contracts and the intense interest in the American energy industry is that state-owned enterprises will return to prominence. All the large Chinese engineering and energy firms are state-owned. Even in property, where there are many private Chinese players, the biggest single investor is state-owned Shanghai Greenland.
This will mean that the future of Chinese investment in the U.S. will look a fair amount like the past. There will be boom periods, but also busts tied to political bumps in the road. For example, the growing role of Chinese state firms could become an issue in the 2016 election. But even if investment declines in a particular year, it should still breach $100 billion in total by 2017 and continue to rise (unsteadily) from there. Get ready.