Tea Leaf Nation

The Chinese Are Coming, and It's Going to Be Fine

Chinese companies will create jobs stateside and are required to play by U.S. rules.

WASHINGTON, D.C. — On April 29, the United States Chamber of Commerce, a U.S. lobbying group, announced that Chinese investment in the United States surpassed U.S. investment in China for the first time. The news has been a long time in coming: Over the past decade, Chinese companies have made major inroads in the U.S. market -- from the energy sector to food production to Hollywood -- and it's clear their influence is growing. Americans worry that China is buying up the world. But there's another, better way for U.S. authorities, businesses, and citizens to approach the influx: Embrace it.

The story of Chinese investment in the United States, which will continue to play out to the tune of billions of dollars over the coming decades, is already well over a decade old. According to New York-based advisory firm Rhodium Group, Chinese investment in the U.S. increased by 600 percent from 2005 ($2 billion) to 2013 ($14 billion). Chinese firms first caught widespread U.S. attention in 2005 with one stunning success and one abject disaster. On the positive side of the ledger, Lenovo, a personal computer and consumer electronics firm, successfully bought U.S.-based tech firm IBM's ThinkPad laptop brand in 2005 for $1.25 billion. The fact that a Chinese firm hoped to buy a piece of a premier U.S. corporation led to a group of three Republican committee chairmen, led by House Armed Services Committee Chairman Duncan Hunter, to call for further scrutiny of the deal. But the transaction still went through relatively smoothly; it made practical business sense for IBM to sell off its personal computing division, and Lenovo was the best suitor.

By contrast, that same year, a highly politicized $18.5 billion proposed acquisition of California energy firm Unocal by state-owned China National Offshore Oil Corporation (CNOOC) made U.S. headlines, but scrutiny from politicians and the media killed the deal and forced CNOOC to eventually withdraw its bid. Duncan Hunter was again at the forefront, claiming that the deal posed a significant threat to U.S. national security, despite a fairly strong business argument why it made sense.

Increased corporate investment from China naturally leads to a number of legitimate questions and concerns. Who will be able to access the information Americans share on their smartphones? Will the pork they serve their families still be safe? Will Chinese firms impose unfair labor practices on U.S. workers? After studying Chinese firms for a decade, I am convinced that not only is the United States capable of handling these risks, but it is also in a position to capitalize on the phenomenon.

First, Chinese firms bring a great deal of cash to the table. Chinese global outward investment reached $85 billion in 2013, $14 billion of which ended up in the United States. A potent example illustrating the positive side of Chinese investment can be found in Michigan-based automotive steering firm Nexteer. During the global financial crisis, Nexteer CEO Robert Remenar targeted Chinese investors for his faltering firm. In 2010, he found a new owner in Chinese company AVIC Automotive, a state-owned firm, which bought Nexteer for $465 million. Under the new ownership, Nexteer's CEO retained his entire management team and his decision-making authority, and was able to revitalize the company in a few short years. In December 2013, Nexteer's president and global chief operating officer, Laurent Bresson, told local media that the firm was in "extremely rapid growth mode." In the two years following the deal, Nexteer invested more than $220 million in its Saginaw, Michigan operations, where the firm remains headquartered today.

In addition to pumping capital into cash-strapped U.S. firms, Chinese companies can also fuel job growth and add valuable tax dollars at the state and federal levels. In November 2000, Danish shipping giant Maersk Line ended its service to the Port of Boston, jeopardizing 10,000 local jobs. By April 2001, port director Mike Leone traveled to Beijing to meet with the management team of the China Ocean Shipping (COSCO). His negotiations proved successful in March 2002 when COSCO filled the void left by Maersk and opened direct service from China to Boston, not only saving those 10,000 jobs, but also creating additional ones through a $250 million investment into an expanded container handling facility.

Chinese auto parts firm Wanxiang America has also saved thousands of jobs for the U.S. economy. By January 2013, the firm saved more than 3,000 U.S. positions through multiple acquisitions of foundering U.S. companies. Headquartered in Elgin, Illinois, Wanxiang America has become a $2.5 billion corporation since its founder, Pin Ni, started the U.S. subsidiary out of his home in 1994.

Of course, many in the United States are rightfully worried about the threat Chinese investment could pose to domestic security and competitiveness. In October 2012, an extensive U.S. House Intelligence Committee investigation into Chinese telecommunications firms Huawei and ZTE found that "the risks associated with Huawei's and ZTE's provision of equipment to U.S. critical infrastructure could undermine core U.S. national-security interests." The Chinese wind turbine producer Sinovel divested its U.S. operations in July 2013 after it was charged in U.S. federal court with stealing trade secrets from its former U.S. supplier.

But the vast majority of concerns about the risks Chinese investment poses to the United States can be addressed under current regulatory processes. In particular, the inter-agency Committee on Foreign Investment in the United States (CFIUS) exists to "to review transactions that could result in control of a U.S. business by a foreign person...in order to determine the effect of such transactions" on national security. And it can block or limit the scope of transactions to the extent necessary to protect that security. The most recent CFIUS report to Congress, released in December 2013, found that the United Kingdom accounted for the most reviewed deals (21 percent of the total), while deals originating from China, increasing in frequency, accounted for 12 percent of reviewed deals over the same time period.

There's also a widespread misconception that Chinese companies aren't held to the same standards as U.S. firms. But whether it's food safety, fair labor standards, or corporate accounting and reporting, Chinese companies operating stateside are bound by the same laws and regulations as their industry peers -- with no exceptions. These firms, which operate as U.S. subsidiaries of Chinese parent companies, receive the same treatment as any U.S. firm. For example, the May 2013 announcement that a Chinese firm was acquiring Smithfield Foods, a U.S. pork producer, led to immediate public outcry about food safety. After an extended CFIUS review process, the deal ultimately went through because the committee reached the conclusion that the acquirer, Chinese-owned Shuanghui International, posed no threat to U.S. consumers compared to any other U.S. food products firm.

The ongoing politicization of deals like Shuanghui-Smithfield and CNOOC-Unocal frustrates Chinese officials and business people alike. In July 2013, the Chinese ambassador to the United States, Cui Tiankai, was quoted in his country's state media lamenting the "political obstacles" confronted by Chinese investors in the United States and urged "pragmatic efforts to eliminate these obstacles as soon as possible."

Contrary to populist rhetoric, the internationalization of Chinese firms is not part of a grand scheme for the Chinese government to infiltrate U.S. society. To be sure, there are indirect benefits for China itself, including an ability to diversify investments overseas, gain access to natural resources to fuel the Chinese economy, and increase its soft power in the world's richest and most powerful country. Nonetheless, the primary motivations of Chinese companies remain commercial. The Chinese market is intensely competitive; firms need access to new markets, brands, technology, and managerial talent. Expansion into advanced economies like that of the United States allows Chinese companies to hasten the evolution of their businesses.

This is also a two-way street. While Chinese companies are eager to bring their investment dollars to the United States, they will only do so if they are confident of smooth, successful deals. If these firms are met with unclear, inconsistently applied, or politically motivated regulatory procedures, the United States will miss out on a tremendous opportunity. For this to work, U.S. media and politicians should stop politicizing the small number of deals gone wrong. It simply perpetuates the myth, mainstream in China, that their investment is not particularly welcome in the United States. This ignores what the data actually reveals, which is that the vast majority of attempted Chinese investments are successfully completed without government interference. If the negative rhetoric continues, Chinese firms, pockets bulging with cash to spend, will simply take their business elsewhere.

There's one last reason not to spend too much time wringing one's hands over this new trend: The vast majority of Chinese firms still cannot compete against U.S. firms on the latter's home turf. In particular, their Chinese management teams lack significant international business experience, especially in advanced economies like the United States, which feature complex regulatory environments. To wit: Chinese athletic apparel firm Li-Ning failed miserably during its first foray in the United States in 2010. For starters, its products did not meet the needs of U.S. consumers. Li-Ning's flagship store in Portland, Oregon sold unpopular items including badminton rackets, kung fu apparel, and table tennis supplies. The firm's mismanagement of its U.S. leadership team even resulted in one of its U.S.-based executives to successfully sue Li-Ning for $1.25 million for calling him derogatory words and reneging on a promised promotion. U.S. companies and executives should try to understand the implications of this trend for their business and identify potential Chinese players emerging in their industry to ensure future competitiveness. 

Chinese companies are already operating in the United States, and this phenomenon will only continue to grow in the coming years. These transnational firms will irrevocably reshape the global business landscape, and their investments will bring tangible benefits. Ensuring there are clear rules in place that are fully understood by potential Chinese investors will ensure the United States can maximize beneficial investment while discouraging any that pose a national security or anti-competitive threat. From a U.S. perspective, whatever challenges Chinese firms may present, it is far better to have them emptying their wallets stateside than sending those billions of dollars somewhere else.

Photo: Getty Images

Tea Leaf Nation

Chinese to Rest of World: Ignore Our GDP

Who cares who's No. 1, they say. Quality of life is what matters.

The U.S.-based World Bank grabbed everybody's attention by announcing that China was poised to displace the United States as the world's largest economy based on purchasing power. But a survey of the Chinese web shows people at home aren't buying it. 

The startling report, released April 30 by the International Comparison Program, which is hosted by the World Bank, concluded that China's economy was much bigger and faster growing than expected, and was also likely to eclipse the United States by the end of the year. (The United States has held the top spot since 1872.) The U.K.-based Financial Times wrote that the report revolutionized "the picture of the world's economic landscape, boosting the importance of large middle-income countries." But China's National Bureau of Statistics declined to publish the report and expressed reservations about its methodology, and the Times reported that Chinese authorities even wanted it thrown out. Meanwhile, Chinese online reaction, rather than crowing, has ranged from incredulity to scorn. For ordinary people, the projection contrasts starkly with their everyday reality. 

Chinese state media initially steered clear of the news, prompting news portal Sina.com to round up overseas coverage instead, cobbling together translated excerpts of coverage by the Times and Washington Post. That article drew hundreds of comments, including one posted by a reader from the inland province of Henan who wondered aloud how anyone could get excited over numbers based on a "bubble" economy. "In China, the money that it takes to buy one house could buy several houses overseas, but our salaries aren't one-fifth of theirs," the user wrote. "Is it worth being proud of this kind of sham GDP?" 

Reactions were similar on Weibo, China's leading Twitter-like social media platform, with many complaining that China was a rich country with a poor population. "Economic figures may present an encouraging picture, but the economic realities are a different story," wrote one reader in reaction to a piece in financial news magazine Caixin. "The economy can't just enrich the rich, or it's not a healthy economy." 

Others seemed concerned that a place at the top would send other nations to China with hat in hand. "Once you're the richest, then everyone wants to borrow from you," one wrote. Many worried that China might be puffed up by the idea of overtaking the United States and fail to realize how much work remains in order to catch up with other developed nations. "China, don't want to lose sight of yourself because of this media commentary," wrote one Weibo user. "The best China is still a ways off."

State media ultimately decided to push back on the report as well, albeit after netizens had led the way. On May 4, official Xinhua News Agency published an analysis arguing that economic parity with developed nations was in fact still decades away. "From economic quality to standards of living, China is still a developing nation," it said. "To catch up with the world's developed nations, China has a long way yet to go." A May 5 article on the website of state-run China Radio Network argued that the findings were "more the product of statistical research" than reality. Despite aggregate numbers, the article insisted, "development is imbalanced, per capita [that is, per person] GDP is low, and China's status as the world's largest developing nation has not changed."

The modesty is partly a bid to avoid some of the burdens carried by developed nations, including tough restrictions on carbon emissions, said Damien Ma, an expert on China's economy and co-author of In Line Behind a Billion People. "China, of course, has been gradually stepping up in the global arena, but still prefers to remain largely passive" on issues that don't gibe with its interests, Ma told Foreign Policy. Maintaining China's status as a developing nation can make it easier to resist pressure to curb emissions or reform its currency.

China's distaste for the No. 1 label also reflects a waning of the "GDP fetish" that held China in thrall for the past few decades, Ma said. "The political mandate is shifting from a singular focus on GDP" to one that puts greater emphasis on quality of life issues such as public health, food safety, and the environment, he added. Though a lesser headline, improvement of those essential services would probably be preferable to most Chinese than any statistical crown. As one Weibo user opined, "it doesn't matter if we overtake America or not. As long as people feel that life is getting better and better, that is what's most important." 

Photo: AFP/Getty Images