During the late 1980’s, Americans were in a tizzy during the wave of Japanese corporate and real estate acquisitions. Well, here come the Chinese and, in all likelihood, here comes the tizzy.
When Americans think of China, here’s what comes to mind:
- They’ve taken our jobs (see any Trump speech).
- They’ve hacked our government and corporations.
- They keep their currency artificially devaluated.
- They can’t wait to do business in China.
- They can’t wait to visit this beautiful and historic company.
What doesn’t come to mind is how many businesses and property assets are owned by Chinese investors and wealthy individuals.
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Chinese purchases of U.S. corporations are setting records, and this isn’t a passing phenomenon. Private companies, state-owned enterprises, and individuals aren’t into trophy acquisitions, as many of the Japanese were. The Chinese are after “the commanding heights,” as President Xi Jinping put it a couple of years ago, in industries they identify as key 21st century drivers.
This raises complex questions, notably in cases potentially involving national security considerations. But Washington’s biggest problem is simple: It has no coherent response to this accelerating trend.
The U.S. needs clear, sound policies governing investment from China. It doesn’t have any, and there’s no sign Washington’s developing one.
Absent a good policy, we’re turning the investment-approval process into a disguised form or protectionism. These are worse than inadequate responses: They endanger long-term U.S. interests.
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“We’re now at risk of a serious backlash in Congress and among the public,” says Robert Dilenschneider, founder of the Dilenschneider Group, a New York consulting firm. “At some point this is going to come back full circle.”
The stats are astonishing. Seven years ago, Chinese acquisitions in the U.S. averaged 13 annually, according to the inter-agency CFIUS, the Committee on Foreign Investment in the U.S., which approves or blocks inward investments from abroad. By 2013 the average was up to 43.
Last year Chinese acquisitions in the U.S. totaled 103, Rhodium Group, a global research and advisory firm with a strong focus on China, recently reported. “The deal pipeline is at an all-time high at the beginning of 2016,” the Rhodium paper notes.
That’s already plain. So far this year Chinese investors have spent $40 billion buying up U.S. companies—“already nearly twice the amount for all last year,” according to Dilenschneider.
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There are some big names here. In January GE agreed to sell its appliance business to Haier, China’s big white-goods maker, for $5.4 billion. The same month Zoomlion Heavy Science & Technology offered $3.3 billion for Terex Corp., a maker of cranes and industrial machinery. These are among $22 billion worth of deals now pending, Rhodium estimates.
Last year, Tsinghua Unigroup was rebuffed when it offered $23 billion for Micron, but analysts think a Chinese investment in the California chipmaker remains likely. (Tsinghua subsequently paid $3.8 billion for a minority stake in Western Digital, a hard-drive maker.)
Two factors drive this trend. China developed a serious case of flight capital after the economy showed signs of weakness last year. In effect, those investing abroad are shorting the yuan on the expectation it will weaken further than it already has.
Beijing’s clearly eager to stanch this flow. It’s holding the yuan steady in a forecasted band between 6.45 and 6.85 to the dollar this year. In March, China’s foreign exchange reserves grew for the first time in five months, suggesting capital flows have begun to reverse—which is exactly what China wants.
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But the second factor won’t fluctuate according to currency rates and other market conditions. China wants a presence in the industries it sees as essential to sustained growth. High technology, biotech, infrastructure, and space: These will drive global demand in decades to come, Beijing’s planners believe, and the easiest way to get into them is to buy in.
The U.S. isn’t China’s only acquisition target. Australia actually tops the U.S. as a destination for Chinese capital, although this includes a lot of property and farmland deals.
At $23 billion, direct Chinese investment in Europe also hit a record last year, Rhodium reports. If ChemChina’s $43 billion bid for Syngenta is approved by yearend, as appears likely, it will be the largest Chinese acquisition overseas to date. The Swiss company is a leader in developing genetically engineered crops.
But the U.S. faces challenges other countries don’t. The U.S. is the source of most of the cutting-edge technologies the Chinese are eager to acquire and has national security concerns neither the Australians, French nor Germans need worry much about.
Why doesn’t Washington have a set of policies and guidelines defining what’s allowable and what’s not as the flow of direct Chinese investment accelerates?
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As it stands, CFIUS rules on an ad hoc, deal-to-deal basis. Those familiar with its review process say it’s a dense, opaque bureaucracy whose wheels grind slowly and whose decisions exhibit no pattern.
Something close to confusion appears to reign as a result. Two months ago Fairchild Semiconductor walked away from a $2.5 billion Chinese acquisition bid because it feared CFIUS would block it. Syngenta’s U.S. subsidiary means that deal may be blocked. So might Zoomlion’s bid for Terex, because Zoomlion’s a supplier for the People’s Liberation Army. We’re talking about a maker of cranes, don’t forget.
Two weeks ago, Anbang Insurance abruptly withdrew a $14 billion bid for Starwood Hotels. Marriott won, and will now be the world’s No. 1 hotelier.
Anbang isn’t saying why it withdrew its offer. But among the uncertainties hanging over the proposed deal: Starwood has hotels near the White House and the Treasury department. Think about it: CFIUS might have blocked a hotel acquisition on national security grounds.
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This is not an orderly, predictable process, and it’s too prone to special-interest pressure. “The committee responds to lobbyists and strong arguments,” Dilenschneider said in an interview.
“It sounds like you mean protectionism and don’t want to use the word,” I replied.
“That’s exactly what I mean,” he said.
There are risks here, especially given the fragility of U.S.-China relations at the moment and the anti-Chinese grandstanding now common on the presidential campaign trail. U.S. businesses could get hurt if the Chinese decide retaliatory measures are justified. So could the trade relationship, to say nothing of bilateral ties.
“Should we designate which industries we consider strategic so everyone knows the rules?” Dilenschneider asked. “That would be very useful, but we don’t have the political will to do it.”