Just last November a governor from the state of Nebraska, in the U.S., led a trade delegation of 80 members to Macau, Hong Kong and China. The mission was twofold: push Nebraska products to an expanding middle-class market in China, and procure Chinese investment in the state.
As Governor Pete Ricketts told Business Daily at the time, for “Chinese companies that are looking to come to the market to help expand their presence to the United States, we’re a wonderful opportunity for them”.
This trend of foreign direct investment is not new, with the report by the National Committee on U.S.-China Relations – entitled ‘New Neighbours’ – pointing out that from 2000 to end-2016 the state has seen US$480 million in Chinese investment, a ‘modest’ amount compared to its neighbours given that the state has ‘not been a significant historical target for FDI (foreign direct investment)’.
Just as Governor Ricketts pointed out at the time that “our largest industry is agriculture and our second is manufacturing,” the report notes that the ‘most promising areas for future Chinese investment’ in the state ‘are agriculture and energy,’ adding ‘Nebraska has a particularly strong reputation as a national leader in agricultural biofuels, which could draw future Chinese FDI’.
One of the deals comprising much of the FDI into the state so far was the acquisition of Smithfield Foods by meat processing company Shuanghui (since renamed the WH Group), with the report pointing out that ‘almost 4 per cent of Nebraska’s manufacturing employment’ – or 2,700 jobs – result from operations linked to the company. The Governor pointed out that although FDI to the state from China is still lagging Japan, which has “really helped us grow jobs in Nebraska . . . I think there’s the same opportunity for Chinese investors to find that opportunity as well”.
Come one, come all
The Governor is not the only one as the report points out that 178 individual Chinese investments over the course of last year ‘included more than 1,300 new U.S. operations, bringing the total number of Chinese-owned establishments in the U.S. to 3,200 from just 1,900 at the end of 2015’.
The largest of these deals were the US$6 billion purchase by HNA group of Ingram Micro, General Electric’s purchase for US$5.6 billion by Haier, an investment by Angang in Strategic Hotels’ real estate portfolio worth US$5.5 billion, and the purchase of Lexmark printer company for US$3.6 billion, which closed just a week after Governor Ricketts’ trip to the MSAR.
The U.S., in fact, ‘became one of the top destinations for Chinese outbound investment in 2016,’ while mergers and acquisitions were the main avenue used to do so.
The state which clocked the most Chinese FDI during the year was California, receiving investments in ‘entertainment, (Legendary Pictures) transport and infrastructure (Ingram Micro), information and communications technology (OmniVision), and real estate and hospitality (the Montage Laguna Beach, the Ritz Carlton in San Francisco, and the Four Seasons in Palo Alto’.
Aside from California, one of the major points of focus for FDI was New York, primarily in ‘commercial real estate and hospitality, with the US$1.03 billion acquisition of a 45 per cent stake in 1221 Sixth Avenue by China Investment Corporation attracting the attention of regulators worried about capital outflows from the Mainland. The state also saw the purchase of a 13.5 per cent stake in auction house Sotheby’s by a company led by the grandson-in-law of Mao Zedong the same year.
Cumulatively, district NY-12 of the state of New York received the most investment during the year, at US$8.66 billion, while IL-07 of Chicago, Illinois in the Midwest received the second highest, at US$3.88 billion. Chinese companies over the course of the year ‘added about 50,000 U.S. employees to their payrolls’ during the year.
‘The total number of Americans directly employed by Chinese-owned U.S. companies reached 141,000 at the end of the year, a 46 per cent increase from 2015 and more than nine times higher than 2009,’ points out the report. The highest concentration of these jobs during the year was in district KY-03 of Louisville, Kentucky in the Midwest, with 6,020 jobs provided by Chinese companies that year.
In fact, the report says that ‘there were few cases in which Chinese companies downsized U.S. operations and employment in 2016,’ while noting that ‘Chinese investors do not have a greater propensity than other foreign investors for moving research and development and other high value-added activities back to their home country post-acquisition,’ pointing out in particular that ‘the great majority of Chinese investors continued to add local staff in the U.S. during the year’.
Keeping the door open
Yet, despite the data, political pressures built up over the course of President Trump’s campaign, since slightly tamed by ongoing dialogue between Chinese President Xi Jinping during and since his visit to Mar-a-Lago (as evidenced by the u-turn in calling China a currency manipulator) and ongoing changes in policy both in China and the U.S. contribute to uncertainty for investors.
‘After a booming 2016, the prospects for 2017 are more complicated,’ notes the report. ‘The commercial rationale for further Chinese expansion in the U.S. economy remains strong, but Chinese capital controls, likely changes to U.S. FDI policy, and an uncertain trajectory for broader U.S.-China economic relations are headwinds,’ notes the report.
On the China side, administrative measures to stop capital outflows have dropped Chinese global outbound investment ‘to 2015 levels, which suggest a substantial decline in 2017 investment levels’ compared to last year, notes the report.
Meanwhile, FDI policy changes in the U.S., under a President who ‘has promised a tougher stance toward economic interactions with China, including FDI,’ via an expanded use of the Committee on Foreign Investment in the United States and more intense scrutiny of Chinese investment, could still come into place this year, the report concludes.