A gal­lop­ing start in US in­vest­ments

China is the 26th largest in­vestor in the US, but two an­nounced deals in the first month of the new year show that more are on the way as re­la­tions be­tween the two su­per pow­ers im­prove, say trade ex­perts, China Daily’s Zhang Yuwei re­ports from New York.

China Daily (Canada) - - IN DEPTH -

The year of the Horse in the Chi­nese lu­nar cal­en­dar got off to a good start for Chi­nese in­vest­ments in the United States with the an­nounce­ment of big deals and more that are ex­pected to be in the pipe­line. This week Len­ovo Group Inc, the world’s largest per­sonal-com­puter maker, agreed to buy Google Inc’s Mo­torola hand­set di­vi­sion for $2.91 bil­lion, mak­ing it China’s largest-ever tech deal. The ac­qui­si­tion also puts Len­ovo in the fast-grow­ing smart­phone busi­ness in the US as world­wide PC sales slow. Last year, the global PC mar­ket de­clined 10 per­cent to 314.5 mil­lion units, ac­cord­ing to In­ter­na­tional Data Corp. The news came just days af­ter Len­ovo an­nounced the pur­chase of IBM’s low-end server unit for $2.3 bil­lion.

Both moves re­flect com­ments made ear­lier by Gerry Smith, pres­i­dent of the Amer­i­cas for Len­ovo, that the com­pany’s goal is to “be­come the No 1 smart-con­nected de­vices com­pany in the world.” It’s now No 3 af­ter Sam­sung Elec­tron­ics Co and Ap­ple Inc in the global smart-con­nected de­vice mar­ket.

Len­ovo, which calls it­self a “global com­pany with Chi­nese roots”, has co-head­quar­ters in Bei­jing and Raleigh, North Carolina. It has been fo­cus­ing on its “PC-Plus” strat­egy; that Len­ovo is “a de­vices com­pany, not just a PC com­pany”.

Over­all, Chi­nese in­vest­ment in the US in 2013 dou­bled to a record of $14 bil­lion, driven by large-scale ac­qui­si­tions in food, en­ergy and real es­tate, ac­cord­ing to New York-based re­search firm Rhodium Group, which tracks over­seas Chi­nese in­vest­ments. In that in­vest­ment surge, pri­vate firms are dom­i­nat­ing cap­i­tal in­flows, ac­count­ing for more than 80 per­cent of trans­ac­tions and more than 70 per­cent of to­tal trans­ac­tion value.

The pick up by pri­vate firms in com­par­i­son with State-owned en­ter­prises re­flects the com­mit­ment of the Chi­nese gov­ern­ment to fo­cus on de­vel­op­ment driven by the pri­vate sec­tor, said David Riedel, pres­i­dent of New York­based Riedel Re­search Group. be­cause “Len­ovo is an es­tab­lished player in the US”, said Gafni, who served as deputy na­tional in­tel­li­gence of­fi­cer for CFIUS Sup­port within the Of­fice of the Di­rec­tor of Na­tional In­tel­li­gence. The 2005 deal went through even when IBM de­vices were widely used in the US gov­ern­ment.

Gafni pointed out that one po­ten­tial con­cern would be that there is “sen­si­tive in­for­ma­tion” re­lat­ing to the cus­tomers of Google — which owns Mo­torola — that the US gov­ern­ment doesn’t want to share with any for­eign com­pa­nies.

Also, if any part of the trans­ac­tion that con­cerns li­cens­ing from Google, it can be another po­ten­tial is­sue be­cause CFIUS doesn’t in­de­pen­dently look at li­cens­ing trans­ac­tions. It looks at ac­qui­si­tion of con­trol.

“But if the li­cens­ing of the cer­tain in­tel­lec­tual prop­erty is some­thing you can­not sep­a­rate from the rest of the trans­ac­tion, in this case CFIUS might want to con­sider th­ese is­sues and to see if they are ‘sen­si­tive tech­nol­ogy’,” Gafni said, which he adds, might pro­long the re­view process but not nec­es­sar­ily mean it will fail.

Ni Pin, pres­i­dent for Wanx­i­ang Amer­ica, says CFIUS is just “a process is­sue”.

“As long as you are trans­par­ent, you fol­low the pro­ce­dure and fol­low the rules, and ad­dress the is­sue, then it should be OK,” Ni said af­ter the deal was closed.

As for 2014, Aaron Brick­man, deputy ex­ec­u­tive di­rec­tor of Selec­tUSA within the US Depart­ment of Com­merce, said that it is go­ing to be “ex­cit­ing” for Chi­nese in­vest­ment in the US. He said he based his op­ti­mism on “suc­ces­sive years of in­creased bi­lat­eral en­gage­ment be­tween com­pa­nies from our coun­tries.”

Selec­tUSA was es­tab­lished in 2011 by ex­ec­u­tive or­der of Pres­i­dent Barack Obama. The gov­ern­ment-wide pro­gram en­cour­ages and fa­cil­i­tates for­eign di­rect in­vest­ment (FDI) in the US and reshoring — the re­vers­ing of out­sourc­ing of busi­ness op­er­a­tions back to the US — to cre­ate jobs and spur eco­nomic growth.

China is the 26th largest in­vestor in the US, ac­cord­ing to the US Bureau of Eco­nomic Anal­y­sis.

“There is still a rel­a­tively small amount of Chi­nese in­vest­ment in the US, but this is grow­ing,” Brick­man said. “No com­pany is truly global un­less it is in the US and we got the job cre­ation here and another global brand here, it’s a truly win-win.”

Brick­man said Chi­nese in­vest­ment “learns from one deal at a time” and Chi­nese com­pa­nies suc­ceeded in the US “on a case-by-case ba­sis”.

“We see that the learn­ing curve get­ting less steep for Chi­nese com­pa­nies in terms of Chi­nese firms suc­ceed­ing and find­ing part­ners here,” Brick­man said. “We are see­ing a sec­ond gen­er­a­tion of Chi­nese com­pa­nies now who have the lux­ury of fol­low­ing their peers, of see­ing suc­cess sto­ries and good case stud­ies about how to en­gage in the US.”

Among the to­tal of 82 deals last year — 44 ac­qui­si­tions and 38 green field projects — and six trans­ac­tions ac­counted for more than 80 per­cent of to­tal com­bined value, ac­cord­ing to Rhodium. They were: Shuanghui-Smith­field; CNOOC-Nexen US; Sin­pec-Mis­sis­sippi Lime JV; Fo­sun-Chase Man­hat­tan Plaza; Gen­eral Mo­tors Build­ing (40 per­cent stake ac­quired by group led by Soho China CEO Zhang Xin); and Sinochem-Wolf­camp Shale.

Brick­man said cheap en­ergy costs in the US have “a domino ef­fect through­out the US econ­omy’’ be­cause not just en­ergy-in­ten­sive in­dus­tries, but all types of in­dus­tries are con­sid­er­ing in­vest­ing in the US.

Brick­man said that it’s im­por­tant for Chi­nese in­vestors to con­tinue to un­der­stand the US mar­ket and to work with pro­fes­sion­als and ser­vices, in­clud­ing the le­gal and busi­ness strat­egy sides.

Carl A. Valen­stein, a Wash­ing­ton-based part­ner with the law firm Bing­ham McCutchen LLP, says many op­por­tu­ni­ties are lined up for Chi­nese in­vestors par­tic­u­larly in in­fra­struc­ture, which were de­tailed in a re­cent US Cham­ber of Com­merce Re­port.

Com­pleted deals last year have shown that Chi­nese in­vestors are be­com­ing “more so­phis­ti­cated in man­ag­ing the risks as­so­ci­ated with such trans­ac­tions, which in­clude na­tional se­cu­rity con­cerns and ad­verse re­ac­tions to Chi­nese own­er­ship in cer­tain in­dus­tries”, Valen­stein said. Di­verse in­vest­ment

“The largest Chi­nese US in­vest­ment trans­ac­tion to date — the Smith­field ac­qui­si­tion — cleared the CFIUS process not­with­stand­ing sub­stan­tial op­po­si­tion,” Valen­stein said. “Po­ten­tial lim­i­ta­tions on Chi­nese in­vest­ment in the US in 2014 may also arise from Chi­nese laws and reg­u­la­tions, in­clud­ing the Chi­nese out­bound in­vest­ment ap­proval process and State-im­posed con­di­tions on out­bound in­vest­ment,” he added.

In the last decade or so, Chi­nese in­vest­ments in the US have showed diver­sity, rang­ing from tex­tiles to chem­i­cals and au­to­mo­tive com­po­nents to to­day’s real es­tate, food and en­ergy sec­tors. Brick­man sees con­sumer prod­ucts as a fu­ture growth area.

Chi­nese in­vestors’ ex­pand­ing their in­vest­ment port­fo­lio means that “they are eval­u­at­ing op­por­tu­ni­ties across newer sec­tors in the US,” Brick­man said.

Lind­say Con­ner, a part­ner and co-chair of en­ter­tain­ment and me­dia prac­tice at Los An­ge­les-based Manatt, Phelps & Phillips, LLP, says Chi­nese in­vest­ment in the US will see strong growth in the me­dia in­dus­try.

“Par­tic­u­larly in the en­ter­tain­ment in­dus­try, in­creased in­vest­ing ac­tiv­ity be­tween China and the US has been wel­comed on both sides of the Pa­cific, and I be­lieve this trend will grow stronger each year,” Con­ner said. “Chi­nese in­vestors who have made US in­vest­ments have found they re­ceived real value, and much less in­ter­fer­ence from the US gov­ern­ment than they may have ini­tially feared.”

From big deals like Dalian Wanda’s ac­qui­si­tion of AMC The­atres, to smaller deals like Gal­lop­ing Horse’s ac­qui­si­tion of Dig­i­tal Do­main, in­vest­ments have been com­pleted smoothly and prof­itably, Con­ner noted.

“As the tide of cross-bor­der in­vest­ment grows, peo­ple in both China and the US will be more com­fort­able with those in­vest­ments, and will un­der­stand each other’s busi­ness cul­ture bet­ter and bet­ter,” he said.

Rhodium pre­dicts that Chi­nese in­ter­est in US as­sets will re­main “strong” this year be­cause eco­nomic re­forms in China pro­vide a more lib­eral pol­icy en­vi­ron­ment for Chi­nese out­bound in­vestors.

The Third Plenum of 18th Cen­tral Com­mit­tee of the Com­mu­nist Party of China last Novem­ber promised to up­grade the mar­ket’s role from “ba­sic” to “de­ci­sive” in eco­nomic de­vel­op­ment. The Third Plenum was the first one since the new lead­er­ship led by Chi­nese Pres­i­dent Xi Jin­ping took over and was seen as set­ting the tone for eco­nomic di­rec­tions and poli­cies for the world’s sec­ond-largest econ­omy in the com­ing years.

“The Third Plenum very much helps this process be­cause the more China re­forms do­mes­ti­cally and im­proves its econ­omy, the eas­ier it will be for China to com­pete in­ter­na­tion­ally as well,” said Frank Lavin, a for­mer US un­der­sec­re­tary of Com­merce for in­ter­na­tional trade.

Dan Stein­bock, re­search di­rec­tor at the In­dia, China and Amer­ica In­sti­tute, said re­form es­tab­lished by the Third Plenum will take time to be ex­e­cuted and take ef­fect mostly in the “medium-term”.

“To both sides, then, it is not yet the re­al­ity of the re­forms that’s de­ci­sive; it’s too early for that. Rather, it’s the in­ten­tion, di­rec­tion and the early ex­pe­ri­ences and pace of the cur­rent re­forms that re­ally mat­ters,” said Stein­bock.

“From the US per­spec­tive, the de­ter­mi­na­tion and di­rec­tion of the re­forms will make China an even more at­trac­tive trade and in­vest­ment part­ner; from the Chi­nese per­spec­tive, only the broad and deep im­ple­men­ta­tion of the re­forms will sup­port the growth tran­si­tion from in­vest­ments and net ex­ports to­ward con­sump­tion and in­no­va­tion in the main­land,” he added.

On the po­lit­i­cal and bi­lat­eral re­la­tions side, the world’s two largest economies have moved for­ward by con­duct­ing dif­fer­ent talks.

Both coun­tries said they are ready to im­ple­ment the con­sen­sus reached be­tween pres­i­dents Xi and Obama fol­low­ing the two lead­ers’ meet­ings at Sun­ny­lands in Cal­i­for­nia last June.

In De­cem­ber, the two coun­tries con­cluded their an­nual trade talks, agree­ing to re­move some trade bar­ri­ers and build a foun­da­tion for a new model of su­per-power re­la­tions.

The Joint Com­mis­sion on Com­merce and Trade (JCCT), which marked its 30th an­niver­sary last De­cem­ber, has wit­nessed soar­ing bi­lat­eral trade, to­tal­ing $500 bil­lion last year from $4 bil­lion 1983 when it was launched. The dis­cus­sions cov­ered 40 topics in trade and in­vest­ment and reached tan­gi­ble re­sults, ac­cord­ing the Chi­nese For­eign Min­istry.

Car­los Gu­tier­rez, for­mer US Com­merce sec­re­tary, who now serves as a vice-chair of global strat­egy firm Al­bright Stone­bridge Group, said even th­ese talks don’t get into a lot of speci­fici­ties, it is im­por­tant to reach “broader agree­ments”.

“You have some peo­ple who are crit­i­cal, and they want to see some­thing just more than broad, but they don’t un­der­stand that the im­por­tant thing is to agree on a gen­eral di­rec­tion then the de­tails hap­pen,” Gu­tier­rez said in an in­ter­view. “Ev­ery year we were mak­ing progress — maybe the words sound fa­mil­iar but the ex­e­cu­tion was mov­ing ahead — so this is a con­tin­u­a­tion,” noted Gu­tier­rez, who par­tic­i­pated in the JCCT dur­ing his term be­tween 2005 and 2009.

“The top is­sues were is­sues dur­ing my time, so that means they are still around be­cause they will take dif­fer­ent shapes,” Gu­tier­rez said of the re­cently-con­cluded JCCT.

Bi­lat­eral talks made fur­ther progress last July when the two coun­tries an­nounced at the close of the fifth US-China Strate­gic and Eco­nomic Di­a­logue their in­ten­tions to ne­go­ti­ate a US-China Bi­lat­eral In­vest­ment Treaty (BIT) that would cover all stages of in­vest­ment and sec­tors.

The cur­rent round of BIT ne­go­ti­a­tions is be­ing held in China and still is at “an early stage in the ne­go­ti­a­tions”, ac­cord­ing to a US State Depart­ment spokesman with­out fur­ther de­tails.

“A suc­cess­ful high stan­dard BIT ne­go­ti­a­tion would sup­port an open global econ­omy by fa­cil­i­tat­ing and pro­tect­ing in­vest­ment and en­hanc­ing trans­parency and pre­dictabil­ity for in­vestors of both coun­tries,” said the spokesman, who asked not to be named.

Robert Kahn, a se­nior fel­low for in­ter­na­tional eco­nom­ics at the Coun­cil on For­eign Re­la­tions (CFR), said State-owned en­ter­prises, mar­ket ac­cess and prop­erty rights are ma­jor is­sues that the two sides should fo­cus on in this on­go­ing BIT.

Head­ing into this year, another ma­jor talk that trade and in­vest­ment ex­perts are watch­ing closely is the Trans-Pa­cific Part­ner­ship (TPP).

The US-led trade pact TPP — now with 11 other mem­bers rang­ing from Aus­tralia and Peru — was a re­gional free trade agree­ment among Chile, New Zealand and Sin­ga­pore back in 2005. Ja­pan and Mex­ico were among re­cent mem­bers of the trade pact that aims to pro­mote trade, in­no­va­tion and eco­nomic growth. China said last year it will study the pos­si­bil­ity of join­ing the talks.

Justin Yifu Lin, for­mer se­nior chief econ­o­mist with the World Bank, said it is gen­er­ally ben­e­fi­cial to join the pact be­cause its role is get­ting more im­por­tant in the global econ­omy. Be­cause of the size of the Chi­nese econ­omy and its ac­tive dy­nam­ics in trade with other coun­tries, it should “cer­tainly par­tic­i­pate in the dis­cus­sion about the new trade frame­work”, said Lin. Im­pact on China

“China fol­lows the progress of the TPP, is not cur­rently in talks but does not ex­clude even­tual mem­ber­ship. It is a pru­dent ap­proach,” said Stein­bock, adding that the pact be­came “less open and less in­clu­sive” since the US joined it in 2010.

“Since the talks have been clouded in se­crecy, it is hard to say be­cause the pros and cons of the TPP mem­ber­ship de­pend on the fi­nal agree­ment,” Stein­bock said.

Lavin, who founded Ex­port Now, an online plat­form that helps US busi­nesses to sell through e-com­merce to China, said the main im­pact on China — if it joined — would be that it gains greater ac­cess to for­eign mar­kets.

“An ad­di­tional im­pact is that China would have to al­low its mar­ket to be more open and it would have to re­duce or elim­i­nate its sub­si­dies to State-owned en­ter­prises, so that they would fairly com­plete in the mar­ket­place,” Lavin said.

CFR’s Robert Kahn said the process for China to join will be “tough” be­cause there are chal­lenges to get some agree­ments done.

“I think there is still hope to get the TPP agree­ment in 2014 but to get there you will prob­a­bly need to have some real con­ces­sions made for the US,” said Kahn.

Kahn said even trade and in­vest­ment talks such as the TPP and BIT will take some time, the two coun­tries’ in­ten­tion to con­tinue to en­gage in the th­ese ne­go­ti­a­tions will still be a “very pos­i­tive” sign to the mar­ket and in­vestors from both sides.

“When you are mak­ing an in­vest­ment de­ci­sion and if you knew this was the di­rec­tion things were go­ing you will feel a lot more com­fort­able,” Kahn noted.

“The US econ­omy is prob­a­bly go­ing to be one of the bet­ter-per­form­ing economies this year (com­pared to Europe and the emerg­ing mar­kets) be­cause there is more sta­bil­ity in the US in the sense that mone­tary pol­icy is on a more pre­dictable path”, said Kahn. Con­tact the writer at yuweizhang@chi­nadai­lyusa.com


A cus­tomer looks at a Smith­field prod­uct at a gro­cery store in New York. Chi­nese com­pany Shuanghuai, now named WH Group, ac­quired Smith­field for $4.7 bil­lion, mak­ing it the largest in­vest­ment by a Chi­nese com­pany in the United States.

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