China Investment in U.S. Economy Set for Record, But Political Concerns Grow

China firms expected to invest $20 billion to $30 billion in U.S. in 2016 but scrutiny could hurt deals

By William Mauldin

China’s Anbang Insurance dropped its bid for Starwood Hotels in March. 

China’s Anbang Insurance dropped its bid for Starwood Hotels in March. Photo: Associated Press
 

Chinese direct investment in the U.S. economy is set to reach a new high this year due to a wave of deals announced in early 2016. But experts say the pace is already slowing as politicians and regulators increase their scrutiny of Chinese details.

Chinese companies are expected to invest $20 billion to $30 billion in the U.S. in 2016, mainly through mergers and acquisitions, compared with a record $15 billion last year and $11.9 billion in 2014, according to a report published Tuesday by research firm Rhodium Group and the National Committee on U.S.-China Relations, which promotes cooperation between Beijing and Washington.

The investment is starting to attract attention, including among Washington regulators and politicians in the 2016 campaign season. Many voters are expressing deep mistrust of U.S. economic and trade ties as Donald Trump criticizes moves by China, Mexico and Japan.

Despite its ascent to the world’s second-biggest economy, China has so far invested little in the U.S. compared with the American investments coming from firms based in the U.K., Japanese and other advanced economies.

Only one-eighth of China’s $120 billion in outward investment last year went to the U.S., according to the report. Companies in North America trailed those in Europe and Asia as targets of Chinese acquisitions in 2015, Dealogic says. But the amount invested in the U.S. is growing rapidly as China plows less into commodity-rich developing countries as Beijing seeks to shift the economy toward technology, services and greater consumer spending.

“They’re scrambling to upgrade their technology, they’re scrambling to build household brands quickly,” said Thilo Hanemann, economist at the Rhodium Group. “We’re seeing a big shift in Chinese investment from the developing world and emerging markets to high-income markets including the U.S., Europe and Australia.”

The first quarter saw Chinese bids for U.S. companies at a dizzying pace, in part an effort to diversify abroad after the country’s market turmoil last August and concerns about a shift in the dollar-yuan exchange rate. Now, some U.S. acquisition targets are more worried about the ability of Chinese companies—many controlled by the state—to get the green light for foreign deals and obtain financing, Mr. Hanemann said.

Without major new deals—such as Anbang Insurance Group Co.’s unsuccessful $13.2 billion bid for Starwood Hotels & Resorts Worldwide Inc.—the pace of acquisitions and “greenfield” investments could ease off for the rest of the year, resulting in a “conservative” estimate of $20 billion to $30 billion for 2016, Mr. Hanemann said.

But the total could be much higher if giant U.S. companies get promising bids in coming months. In Switzerland, China National Chemical Corp.’s $43 billion bid for Swiss pesticide and seed company Syngenta AG helped boost China’s bids for European assets to $61 billion this year, according to Dealogic.

Also weighing on the deals is stepped-up attention from regulators, including the Committee on Foreign Investment in the U.S., which evaluates acquisitions of American business on national-security grounds. Washington lawmakers have pressed U.S. officials to scrutinize deals involving financial infrastructure, such as the Chicago Stock Exchange, and strategic semiconductor technology.

“It certainly could have an impact on the psychology of Chinese buyers—they have a perception that it could be difficult to do a deal in an election year,” Mr. Hanemann said.

Some lawmakers are crying foul, protesting that U.S. firms can’t invest easily in many sectors of China’s economy, while the U.S. market is wide open for their Chinese competitors, or nearly so. Efforts to negotiate a bilateral investment treaty between the two countries have stalled as Beijing has sought to rope off numerous industries.

Still, Chinese-affiliated companies extend across 362 out of 435 congressional districts, according to the report. New York has benefited from Chinese deals related to tourism and financial services, while the Southeast is seeing investments from petrochemicals to manufacturing.

Chicago ranked third on the report’s list of congressional districts in terms of Chinese direct investment in the last 15 years, and the Chicago Stock Exchange triggered alarm bells in Washington this year after it agreed to be bought by a Chinese firm.

“We don’t necessarily want to be invested in by trading partners and have to be overly concerned that they might be getting a better deal from us that what we’re getting from them,” said Rep. Danny Davis (D., Ill.) whose district includes the exchange. Mr. Davis said he has concerns about the U.S. trade deficit and alleged Chinese currency manipulation but understands the deal for his hometown stock exchange, which handles only a fraction of daily U.S. equity trades, is part of living in a global economy.
 

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