US sees record Chinese investment

Chinese foreign direct investment in the United States hit record levels in 2012 and shows little sign of slowing, despite lingering worries among some that the inflow of Chinese money presents a growing security risk to the country.

Chinese companies concluded deals worth $6.5 billion in 2012, an increase of 12 percent from the record $5.8 billion in 2010, according to a new report by New York-based Rhodium Group, which tracks Chinese FDI.

Thilo Hanemann, Rhodium's research director, said he believes the result reflected both the growing determination of Chinese firms to expand overseas, and the attractiveness of US markets and assets to investors.

The most appealing US sectors to Chinese investors were oil and gas exploration, advanced manufacturing that helps Chinese firms move up the value chain, and assets that allow investors to gain solid returns such as utilities, real estate and hospitality, according to the report.

Headlining the year's activities were Dalian Wanda Group's $2.6 billion acquisition of AMC Entertainment, the second largest US theater operator, Sinopec Corp's $2.5 billion investment in a third of Devon Energy's five shale gas assets in the US, and auto parts maker Wanxiang Group's $420 million investment in GreatPoint Energy, a company based in Cambridge, Massachusetts, that converts coal into cleaner-burning natural gas.

Meanwhile, a number of major Chinese FDI deals are still awaiting regulatory approval in the US, signaling that the growth is expected to continue into 2013.

For example, a group of Chinese investors has agreed to buy an 80.1 percent stake in American International Group's aircraft leasing unit for $4.2 billion, and Wanxiang has already been announced as the winner of a bid for battery producer A123 Systems, in a bankruptcy auction.

The Rhodium report highlights that the fast-growing Chinese FDI was in fact one of the few bright spots in a gloomy year for the US economy, which has seen overall global FDI decline sharply since 2009 and the outbreak of global financial crisis.

The United Nations Conference on Trade and Development said in October that China edged out the US to become the world's top FDI destination in the first half of 2012, but added the US may return to the top spot during the second half of the year.

While FDI in the US from Europe and Canada declined by more 50 percent in the first three quarters of 2012, China was among the few countries that has now increased investment in the US for five years running, according to figures from the US Bureau of Economic Analysis — a figure representing a rise of more than 300 percent in that time.

Hanemann believes the bureau's figures are lower than they should be because they do not include flows through offshore financial centers, and Rhodium's China Investment Monitor suggests the increase would be nearer to 1,300 percent if those were included over the five years.

Chinese majority-owned businesses in the US now employ 29,000 people, up from fewer than 10,000 five years ago, and that figure could run into many more thousands if jobs created by firms with minority Chinese investment, and other indirect jobs created by Chinese FDI, were taken into account.

Former US Trade Representative Carla Hills said that she believes Chinese investment in the US is good for both countries.

"China's entrepreneurs benefit from the world's largest consumer market, creative and diverse workforce, management skills, strong global brands, and the attractive business and investment climate found in the US.

"The US benefits from an increase in much-needed tax revenues and jobs generated by Chinese investment," she said.

"As important as these economic benefits are in advancing prosperity in both countries, the most important benefit flowing from increased economic interactions may well be the increase in mutual understanding that will surely occur.

"That helps provide the ballast for overall Sino-US relations," added Hills, who is also chairwoman of the National Committee on US-China Relations.

Opposition remains

But despite support on many fronts, opposition toward Chinese FDI in the US also made frequent headlines in 2012, which Rhodium's Hanemann described as little more than "political games and populist rhetoric" that made "little progress".

The most public case came in early October, when a report released by two members of the US House Intelligence Committee accused operations being run by Huawei and ZTE, the Chinese telecom equipment manufacturers, as representing a possible national security threat.

In September, President Barack Obama had ordered Chinese-controlled Ralls Corporation to cancel a wind farm project near a military base in Oregon, only the second time a US president has formally blocked a foreign acquisition and the first time since 1990. The move triggered a strong protest from the Chinese side, including a lawsuit against Obama being pursued by the Chinese investor.

Wanxiang's bid for A123 Systems and BGI Shenzhen's $118 million bid for Complete Genomics, a bio-tech firm based in California, also attracted opposition from US politicians.

Orville Schell, director of the Center on US-China Relations at Asia Society, said earlier this month that the US government itself is not treating Chinese companies in an unfair or discriminatory way, but US congressional figures very often do have a prejudice against them and create political problems that can make it difficult for Chinese firms to feel welcome.

Hanemann added that he believes such politicization is damaging the perception of the US as an investment destination for China, despite a general welcoming by US business and the hard work done by some of its governors, mayors and other officials in promoting inward investment.

He added that if the US wants to maximize its benefits from China's expected outward FDI boom in years to come, policymakers need to stop beating their drums and instead focus on solutions that allow the US to maintain an open investment environment, while addressing their genuine concerns. Otherwise, Chinese investors will take their cash elsewhere.

Hanemann pointed to the example of Europe, where Chinese FDI has topped $10 billion for the second year in a row, well ahead of what the US received over the past two years.