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China: Investing In The US After Unocal

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Dian L. Chu, Economic Forecasts & Opinions

After state-owned CNOOC was blocked from the Unocal acquisition in 2005, China has instead turned toward other countries such as Australia, Canada and Brazil for its natural resource strategic investments.

While China is the top U.S. debt holder in the world, percentage-of-GDP-wise, the U.S. receives relatively very little non-bond investment from China, based on data tracked by The Heritage Foundation. (See chart) Part of this “allocation difference” could be attributed to the long existing tensions over various issues including, but not limited to—trade imbalance and currency--between the world’s top two economies.

The increasing frictions have prompted the U.S. to scrutinize China-related domestic acquisitions with an extra pair of magnifying glasses.  And the resource and infrastructure sectors appear to be the most politically sensitive.  Even as recent as last December, a Chinese mining company had to back out of a deal to invest in Nevada gold mine after security concerns cited by the U.S. government. (The mine is about 60 miles from a U.S. naval base.)

China - Investing Strategy Shift 

However, Chinese companies have become much more aggressive and savvy in their approach to deal making, and have adapted to the political environment through joint ventures with local companies and small stakes instead of ambitious, high-profile large acquisitions.

Based on the data from the Heritage Foundation, the bulk of Chinese investment in the U.S. since 2005 has been in the financial and real estate sectors. (see graph)  Nevertheless, the shift in approach has helped the Chinese enter into the U.S. energy and power market through the following major deals:

U.S. - Jobs, Jobs, Jobs…Or Not?

Meanwhile, a subtle change is also taking place on the U.S. side.

Reuters reported that China state-owned Anshan Iron & Steel Group, the parent of Angang Steel Co. has agreed to pay $175 million for about 14% stake in a rebar plant that Steel Development Co.--a U.S. private startup-- is building in Mississippi.

Despite a previous report of shelving the project due to congressional opposition citing national security concern (we are talking about a relatively small base-metal rebar plant here), Anshan now says it is still planning to invest in the U.S. And according to Steelorbis.com,

"The Angang official recalled that the US Department of the Treasury had affirmed that the US Overseas Investment Office would deal with any national security concerns in relation to the issue and would seek to maintain an open investment environment.”

This investment reportedly would create about 1,000 construction jobs and more than 200 permanent manufacturing jobs in the U.S. once the facility is complete.

Union’s Also Warming Up to China...Sort of?

Separately, the United Steelworkers (USW), which has backed a myriad of trade cases against China, announced in early August that it had signed agreements with Chinese power generation companies A-Power Energy Generation Systems Ltd., (AAPWR) and Shenyang Power Group (SPG) to supply wind turbines to the SPG-owned 600-MW Texas wind farm set to begin construction soon.

Apparently, the initial criticism that U.S. stimulus money will be funding jobs in China was quelled by A-Power’s plan to purchase up to 50,000 tons of steel from American mills and set up a facility in Nevada, thus creating perhaps 1,000 American jobs.

The USW is calling this “vision for win-win relationships between manufacturers and workers,” but indicates it will not back off its trade cases against China.

A Japanese Evolution

These two deals in the metals sector took place in the context of high unemployment and job losses caused by the global financial crisis, which most likely has somewhat softened the opposition to Chinese investment.

On the other hand, Chinese firms seem to have embarked on an evolution similar to that of the Japanese firms. Back in the 1980s when Japanese companies burst onto the world market, there was a global widespread defensive reaction, particularly in the United States. Then, Japanese firms began to change their investing approach by setting up assembly and full production facilities in the U.S. and eventually found acceptance.

Foreign Investments Contribute To U.S. Growth

The U.S. has the advantage of being one of the most politically stable and attractive regions with rich intellectual and natural resources. Meanwhile, with good cash-flow, strong balance sheets and the implicit support from Beijing, the Chinese state-run as well as private enterprises will continue their overseas expansion.   

Most importantly, foreign investment inflows-- including China’s—contribute to the economic growth and development of the United States, and could potentially help the trade imbalance.

Politics aside, given the size and relative competiveness of its economy, the U.S. should be able to handle a few more billions from China or other trading partners without raising the risk to national security. Otherwise, by alienating allies, the United States could find itself isolated in an increasingly interconnected world, while potentially putting employment, competitiveness, and innovation at a disadvantage.

On the other hand, although the increasingly multi-faceted approach by the Chinese is expected to continue evolving, managing PR, host country perception, political environment and developing relationship could prove to be a greater challenge than anything for Beijing, partly because much of China’s overseas investments are still going through state-owned companies. From that perspective, it would be to China's benefit to speed up its privatization process in order to truly transform its economy.

A Crash or Collision Course? 

Foreign investment in US companies and assets has long been controversial since World War I, but this financial crisis has pushed both China and the U.S. on an accelerated learning curve of cross-border investments. However, taking a crash course--instead of a collision course--will require some give and take from both of the world's top countries.

So, which course would it be?  Only time will tell.

Dian L. Chu, Aug. 21, 2010

 

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Sun, 08/22/2010 - 21:55 | 536722 The Answer Is 42
The Answer Is 42's picture

I doubt the hypocricy and zenophobia behind the Unocal ordeal, and similar others similar episodes, have escaped China's attention. It's impossible to miss. Free-market, as many other sounbytes, are tools to be used to rape others, but can be conveniently thrown away when it becomes inconvenient. Cue in the bailouts.

Moer pathetic, however, is the fact that politicians still keep touting such soundbytes and the populace still buy it. We deserve the politicians we elect, don't we?

Sun, 08/22/2010 - 20:12 | 536611 Jay
Jay's picture

I like the heartwarming story about the United Steelworkers Union vs the Chinese power generation companies. It just goes to show, once again, how free trade (reasonably free) brings people together that would otherwise be at each other's throats. These two disparate groups found a way to make money together and settle their differences without resorting to violence. (Economic intervention is a form of violence.)

Free trade = peace

Economic interventions, tarriffs, quotas, bans, embargos, sanctions, blockades = war

Sun, 08/22/2010 - 19:02 | 536531 DosZap
DosZap's picture

knuckles,

"America ain't so friendly any more."  

You got that right, when did it START in earnest...Nov '08.

While that is totally inexcusable, illegal, and Unconstitutional, those  folks do not have Nuclear weapons. China does, and 2 Trillion of our debt.

Bartanist,

You missed my point, the point is OWNERSHIP...............and China owning US Assets, are a far cry from screwing American Bondholders, at GM, and chrysler.

Sun, 08/22/2010 - 17:21 | 536429 knukles
knukles's picture

Unocal?  After Unocal? 
What a load of political topsy turvy, gritting of teeth, squeezing of rectal strictures?
Lots of embarrassments laid open xenophobia of American Powers that Be.

The Real Disaster...
The total abrogation of senior secured bondholders rights with GM and Chrysler.  Not enough that the very rule of law upon which society's contracts and obligations have been dismembered by the Government itself, the Very Institution Vested with the Responsibility to Defend the Same. 

International Capital Flows will Migrate, Find Friendly Environments wherein the Rule of Law is Intact, Sacrosanct, Held Inviolate by the Government's Very Own Hand.  Whilst the Government itself is the issuer of obligations at the margin.  America ain't so friendly any more.  

Thought the Oligarchs were from Russia?
Think again.

Sun, 08/22/2010 - 17:07 | 536418 DosZap
DosZap's picture

This is what I have said all along...if CHINA had a brain, they would use our worthless FRN's, and buy up US Companies, RE, and invest in partnerships doing this would be a defacto divestment of holding our DEBT, and owning ASSETS.

That WILL one day be worth a lot of bread...............

They do this, and it's WIN/WIN for them, and LOSE/LOSE for us.

Sun, 08/22/2010 - 17:40 | 536456 Bartanist
Bartanist's picture

I am surprised that people do not understand yet that it does not matter at all who are the owners. All that matters are jobs and value creation. If there is  employment then there is investment in the country and a velocity multiplier. Making things in China and selling it in the US is a net value drain and most likely a negative velocity multiplier.

Do I care if Wall Street banks, the US government, the Queen of England, CALPERS, Widows and Orphans, the Rothschilds or Anu himself owns the business. Profits are almost never drained from a company (look at dividend yields for most companies) to the common shareholders. Everything is about employment and financing.

Sun, 08/22/2010 - 21:24 | 536685 MrSteve
MrSteve's picture

Conditional suppositions and rhetoricial posits aside, I deduce this is an assertion of the labor theory of value, a la Karl Marx or Thorstein Veblein, they being from an era when the only value credited to lumber was the labor cost of harvest. The lumber itself was priced as a free good.

What does matter is the currency and country to which profits are "repatrioted" to use an old hegemonist's term for capital flows away from labor. China's domestic mergers in the US are another form of capital or value extraction. Remember, the Chinese are not stupid.

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