Economic Forecasts

Chinese Investors Shopping for American Firms

Early missteps and ongoing political tensions won't slow a growing infusion of Chinese capital into a variety of U.S. enterprises.

Look for Chinese firms to ramp up their investment in U.S. corporations over the next five years. Last year marked a turning point. Spending by Chinese investors to acquire U.S. corporations or buy shares in U.S. firms hit a record high in 2012, and this year it will likely match or exceed that total.

And it isn't only the volume of Chinese investment that's increasing. The Chinese also are broadening their purchases beyond just energy and mineral companies, snapping up firms in a wide array of businesses, from financial corporations to entertainment firms, as well as luxury real estate. And, to avoid a political backlash in the U.S., they're going after smaller companies rather than big, well-known players.

“Get ready — over the next five to eight years we're going to see a big ramping-up of investment from China,” says Ted Moran, who tracks foreign investment at the Georgetown University School of Foreign Service and is completing a study of Chinese investment in the U.S. for the Peterson Institute for International Economics.

What's behind the new buying spree? Several factors. The U.S. economy is picking up, while China's has slowed. Investors there are pessimistic about a worrisome property price bubble. And Beijing's restrictions make it difficult for Chinese firms to expand.

On the other hand, investing in the U.S. is easier, the higher yuan makes U.S. assets less expensive, and the Chinese are learning how to navigate in the U.S. system. Plus, acquiring a stake in U.S. firms gives the Chinese a foothold in the U.S. market and access to American R&D, design and marketing skills, says Thilo Hanemann of the Rhodium Group of New York, which tracks global investment.

Moreover, state governors and legislators in the U.S. are mounting serious efforts to woo Chinese investors in hopes that the acquisitions and new money will create more jobs for their constituents. Officials from Texas, New Jersey, Massachusetts and California, among other states, have all made promotional trips to China in recent months.

What Chinese investment actually brings to American firms varies widely. Most such deals mean an infusion of capital, helping the U.S. company stave off financial problems. Contrary to some fears, the Chinese buyers haven't cut jobs or wages after taking over U.S. companies, but so far they haven't increased employment much, either.

The biggest impediment to expansion of Chinese investment in the U.S. is suspicion that their acquisitions here will threaten U.S. national security, says Derek Scissors, who tracks Chinese investment for the Heritage Foundation, a conservative think tank in Washington. U.S. policy on Chinese investments is still evolving.

Although Chinese investors include some Bejing millionaires and private companies, most of the money comes from China's huge state-owned enterprises, or SOEs, which are heavily subsidized by Beijing. That raises a fear that the SOEs, as owners or stakeholders in U.S. firms, will effectively be agents of the Beijing government.

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So far the interagency U.S. panel charged with policing such deals, the Committee on Foreign Investment in the U.S., has blocked only a handful of Chinese investments. And, except for congressional harumphing that killed a 2005 proposal for a Chinese oil company to buy Unocal, Congress has been relatively quiet on the issue.

And experts who track Chinese investments say that so far, the behavior of Chinese owners hasn't differed from that of investors from other countries, such as Britain or Germany. In other words, they're out to bolster the companies they've acquired and improve their own rates of return.

Despite the recent sharp growth, the volume of Chinese investment in U.S. firms has been relatively small. The Heritage Foundation places the 2012 total at $14 billion; Dealogic, a London-based firm, puts it at more than $10 billion. And the Rhodium Group estimates that Chinese firms completed U.S. deals worth $6.5 billion in 2012.

The wide variety of these figures stems from differences in both the measuring and timing of individual deals. Official U.S. government estimates lag by several quarters — the latest available data are for 2010 — and the numbers published by the Chinese Ministry of Commerce are regarded as flawed and open to suspicion.

But all the trackers indicate that Chinese direct investment in U.S. companies and property hit a record in 2012. And analysts predict it will expand in coming years, even in the face of growing tensions between the U.S. and China on geopolitical issues, such as China's clashes with America's Asian allies over islands in the South China Sea.

Despite the investment surge last year, China is hardly flooding the U.S. with investment dollars. Over the past two years, Chinese companies invested twice as much in European firms as they did in the U.S., and overall, acquisitions and purchases from China still amount to less than 1% of total foreign investment into the United States.

But the underlying base of Chinese investments here has finally reached a critical mass. It's worth recalling that although China's economy has been growing rapidly overall for quite some time, it wasn't until 2003 that it was large enough to become a force in the world economy. Today it's a major engine of global economic growth.

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