China is on the cusp of a lunge overseas that is likely to see it invest $1,000bn-$2,000bn in the next decade. That compares with the far more modest $230bn in Chinese foreign direct investment to date, which makes China the proud owner of just 1.2 per cent of all global FDI stock – on a par with Denmark.
China’s spending spree deserves three cheers
Hardly a day goes by without news of yet another foray by Chinese companies abroad. In their hunger for commodities, technology and brands – or simply for better returns than can be had by buying up US Treasuries – Chinese companies are grabbing assets around the world.
At least that is how it seems. In fact, that is tomorrow’s story. According to a report by the Asia Society*, China is on the cusp of a lunge overseas that is likely to see it invest $1,000bn-$2,000bn in the next decade. That compares with the far more modest $230bn in Chinese foreign direct investment to date, which makes China the proud owner of just 1.2 per cent of all global FDI stock – on a par with Denmark.
In the US, where the question of Chinese FDI is particularly controversial, China’s presence is punier still. That is because, in the first phase of overseas investment, Chinese groups have concentrated on getting commodities and resources, where opportunities are greater in Africa and Latin America. Official Chinese investment in the US amounts to $2.3bn, a paltry 0.1 per cent of all FDI stock. Because of offshore vehicles and the like, that underestimates the true total, which the report puts at $11.7bn. But even that is dwarfed by the $454bn British companies have invested in the US. When it comes to buying up America, China is in the little league with New Zealand and Austria.
That is about to change. Chinese groups have been shifting their focus. Now they are seeking to improve productivity, design and distribution. Targets in the US are attractive. Those already spooked by Lenovo’s purchase of IBM’s ThinkPad laptop unit, or by CNOOC’s failed $18.5bn bid for Unocal, the California-based oil company, ain’t seen nothing yet.
The real question for the US, and other advanced countries, is: should Chinese investments be welcome? Are they part of some Beijing plot to grab technology and knowhow? Or do Chinese companies offer much-needed capital and jobs.
The authors’ sensible conclusion is that the US should develop a more rational response to Chinese FDI. It should remove politics from policy. Recall the initial fevered response to Japan’s purchase of the Rockefeller Center and other icons of American capitalism. After the controversy died, US affiliates of Japanese companies – such as Toyota and Nissan – went on to invest $1,000bn in the US economy, creating 700,000 jobs. (Of course, they did bring Detroit to its knees in the process.)
Certainly, the US has legitimate security concerns. But it has a robust process for dealing with these centred on the Committee on Foreign Investment in the United States, which vets deals that could compromise national security. The authors judge this system generally sound. They point out that all investments, whether vetted by the Cfius or not, are subject to laws in areas including security, antitrust and environmental compliance.
The Cfius system has taken some high-profile scalps. Huawei, China’s successful telecoms equipment group, has come unstuck in efforts to buy US assets over its alleged, and hotly disputed, ties with the People’s Liberation Army. Recently, Huawei agreed to unwind a tiny $2m acquisition of 3 Leaf, a US start-up.
The report warns that as the scale of Chinese ambitions increases, the Cfius will have to work harder to demonstrate it is subject to due process and oversight and convince investors it is “not being used as a tool for protectionism”. It also urges Chinese companies to improve their corporate governance and distance themselves from the state.
With or without the Cfius, the US has sometimes given the impression that Chinese money is unwelcome. CNOOC dropped its bid for Unocal after uproar in Congress and the media, even though the target company’s assets were outside the US. Anshan Iron & Steel provoked opposition to its proposed investment in a new steel mill in Mississippi, while Tianjin Steel’s $1bn investment in Texas breezed through. The report says this “unpredictable politicisation of national security considerations” is causing real problems.
The pressure is about to get more intense. In the past two years, Chinese investments in the US have increased by an annual 130 per cent. The report plays down the idea that Chinese companies are a front for China Inc, saying most are driven by commercial interest. Chinese companies sell Venezuelan and African oil to foreign countries, not to China, if they can get a better price. Only last month, China’s Minmetals walked away from a $6.5bn offer for Canada’s Equinox after Barrick Gold trumped its price. That suggests money is an object to Chinese ambitions.
That is where some will disagree. They see in China’s state capitalism a grand design to create national champions through restricted competition and easy finance. Yet those with faith in free markets should be confident that, in the long run, such companies will fare worse than ones exposed to market competition. Besides, if the US rejects Chinese investments, they will simply go elsewhere.
* An American open door? Maximising the benefits of Chinese direct foreign investment, Daniel H. Rosen and Thilo Hanemann, Asia Society, May 2011 |
