Hurdles to Chinese Investment in the U.S.

Interesting article in the NY Times summarizing a recent Asia Society report about the prospects for Chinese direct investment in the United States (see Chinese Investment Bypasses U.S.).

Flush with capital from its enormous trade surpluses and armed with the world’s largest foreign exchange reserves, China has begun spreading its newfound riches to every corner of the world — whether copper mines in Africa, iron ore facilities in Australia or even a gas shale project in the heart of Texas.

[A new study]…forecasts that over the next decade China could invest as much as $2 trillion in overseas companies, plants or property, money that could help reinvigorate growth in the United States and Europe.

But the report…also warns that the United States risks missing out on a large share of the Chinese investment boom because of politics, a growing rivalry between the two nations and deep-seated perceptions that Chinese investments are unwelcome in America.

Chinese firms engaged in about $5 billion in direct investment in the U.S. in 2010 (see the Asia Society Report on Chinese Direct Investment), representing 10% of China’s total outward direct investment of around $50 billion.

With China’s vast reserves, my expectation, consistent with the conclusions of the Asia Society report, are for that figure to grow exponentially in the next few years. Of course, that’s from a very low base – Chinese outward direct investment currently accounts for only 5% of global outward direct investment flows (by comparison, the U.S. accounts for 25% of such flows).

Insofar as political meddling in Chinese direct investment into the U.S. is concerned, I am generally against political interference in cross-border M&A and greenfield transactions. If a transaction truly raises national security concerns then I see a reason to examine the deal more closely; however, such transactions are extremely rare. My hunch, though, is that politicians (on both sides of the aisle) feel compelled to weigh in on deals when they ought not to, …largely for the purpose of scoring political points.

Some of the high-profile Chinese deals that were politically overly-scrutinized include Lenovo’s acquisition of IBM’s PC business and CNOOC’s attempted acquisition of Unocal. In fact, CNOOC walked away from the Unocal deal, one which did not pose much of a security risk, because they felt that the political hurdles were too great.

In this sense then, I agree with the findings of the Asia Society report that the U.S. should openly encourage Chinese direct investment. In addition, the inward direct investment process should be safeguarded from undue political interference and/or influence.

Inward investment (not just from China, but from any country) brings jobs, tax receipts, and an increase in consumer welfare; it provides an alternative investment outlet for Chinese reserves; and it affords Chinese firms an opportunity to learn valuable skills and capabilities from their acquisition targets (see Chinese Acquisitions for more on this topic).

To me, all the political posturing toward Chinese investment into the U.S. is reminiscent of that which took place in the 1980′s when Japan was the investment scapegoat of choice. As it turns out, many Japanese investments had a positive impact on the U.S. economy (think automakers like Toyota and Honda opening assembly facilities in the U.S.). In some cases, however, Japanese investors ended up buying high only to eventually sell low (think Rockefeller Center and Pebble Beach).

I, for one, wouldn’t be surprised if many Chinese investments followed that latter path…