A Third Straight Record For Chinese Investment In the U.S.
For the third year in a row, Chinese investment in the U.S. (excluding bonds) has set an annual record. In 2014 alone it was $17 billion, a far cry from 2011 when U.S. - China commercial relations soured over the activities of telecom firm Huawei.
There has been no powerful political reaction to a greater Chinese economic presence, no ruinous scandal. And the U.S. has what China wants - land, technology, and strong investor protection. It would not be surprising for Chinese investment in the U.S. to hit $20 billion in 2015, with the potential for more in years following.
Tracking Chinese Companies
According to the just released American Enterprise Institute-Heritage Foundation China Global Investment Tracker, the U.S. is the leading national recipient for investment, at $78 billion since 2005. The Tracker follows Chinese investment and construction all over the world - using corporate information rather than the unhelpful numbers provided by the Chinese government. (These treat Hong Kong as a final destination, rather than a transit point, and show it as by far the top recipient.)
Since 2012 there have been 55 investments of $100 million or more in the U.S. While the acquisition of Smithfield Foods grabbed headlines, Chinese enterprises have also bought stakes in American shale and alternative energy firms, acquired lower-end technology companies, and poured huge sums into U.S. property, especially in 2014.
Looking at the last decade as a whole, finance remains the leading sector at $21 billion, though the vast bulk of that occurred before the Lehman shock. Property and energy investment, in that order, combine for another $27 billion since 2005, and more than half of this amount has been spent in the past three years.
Chinese buyers in all three sectors - finance, real estate, and energy - have made mistakes. Chinese financials bought before the market crash and, to a lesser extent, energy companies may have done the same thing. We could easily be saying something similar in 2016 about currently frenzied Chinese spending on real estate.
There are also non-commercial difficulties. Chinese firms have been blocked from making acquisitions by the U.S. government or by their own national regulators. Since 2005, well over $30 billion in Chinese investments in the U.S. have either been impaired or have failed for non-market reasons.
The state pattern mirrors the sector pattern. Since 2005, with $28 billion in Chinese investment, the state of New York has drawn by far the most spending, but the large majority of that occurred prior to 2012. Since then, California has seen the most $100+ million deals and Virginia the single largest transaction.
Perhaps the most important development is that China's state-owned enterprises (SOEs) have faded into the background somewhat. These firms are sheltered from market competition at home, which provokes charges of unfairness when they appear overseas. SOEs previously dominated Chinese investment in the U.S. But almost 60 percent of the value of investments since 2012 is due to private entities. The private share of the number of transactions is higher still.
Will The Train Derail?
There should be much more Chinese business coming. Twenty-four states, led by Florida, have seen no $100+ million investments yet. Chinese demand for resources and technology will be robust indefinitely, and a weakening home economy could lead firms to seek better access to American consumers, who are far richer than their Chinese counterparts. Similarly, the real estate surge looks like a flight to quality - China storing wealth in the safe haven of the U.S.
Food, shale and green energy, consumer products, the entertainment industry, and tourism are all ripe for Chinese acquisitions. The transportation sector could see intense activity, though in construction rather than investment. State Construction Engineering Corporation has won only a few American contracts so far, especially in light of the fact that Chinese companies are the biggest players globally. Demands for more infrastructure spending in the U.S. translate to more Chinese firms building roads and rail.
This is sure to ruffle a few political feathers, and political risks weigh against the commercial logic of greater Chinese business activity in the U.S. Those giant Chinese engineering contractors are all SOEs, as are the oil majors. Even if private firms remain preeminent, SOEs will be involved in a number of large transactions, offering critics plenty of ammunition.
A potential solution that will be discussed a good deal this year and next is a U.S.-China bilateral investment treaty. The two sides have been negotiating since 2008 and talks intensified last year. It will be difficult to complete a treaty that limits China's poor treatment of foreign firms and its long-standing desire for national champions.
The main cause for hope is the growth in Chinese spending. It provides increasing motivation for Beijing to start following, grudgingly, the Golden Rule of treating foreign firms as it wants its firms treated overseas. If a good bilateral investment treaty can eventually be signed, Chinese investment in the U.S. will set many more records. If not, the road will be bumpier.
