When Japanese investors and their funding first started pouring into the west about 25 years ago, American companies were wary, noted investment expert Bradley Reifler, founder and CEO of Forefront Capital. In particular, Japanese firms bought up troubled businesses and heavily invested in thousands of others. The public became concerned when Japanese investors bought the Rockefeller Center and the American icon Columbia Records.
While people were nervous about foreign investors, the Japanese financial “invasion” was largely profitable for both sides. American companies got a much needed injection of cash and capital. Japanese investors were able to access more diverse opportunities.
Chinese Investments in the U.S.
Now, the U.S. economy is facing another wave of Eastern investors, mainly from China. China’s expanding economic clout and reach have surpassed that of every other nation. In 2013 alone, Chinese investments topped out at $85 billion. Compare this to its $10 billion in foreign investment in 2005, and China’s increasing wealth is obvious.
Much like Japan in the 1980s, U.S. investment opportunities are still highly favored by Chinese investors. In 2013, China invested more than $15 billion in the U.S. More importantly, this injection of capital doesn’t appear to be slowing. As a result of these Chinese investments, 70,000 full-time jobs were created last year.
A large factor in China’s increasing foreign investment is the Chinese communist government itself. Led by new President Xi Jinping, the government is beginning to institute new economic reforms. As the financial sector opens up, Chinese firms are being encouraged to invest in foreign markets.
These investments are not insignificant. Last year, Chinese Shuanghui purchased Smithfield Foods, a giant American pork producer, for $4.7 billion. Currently, that is the largest Chinese acquisition of an American firm.
According to analysts Thilo Hanemann and Cassie Gao in “Chinese FDI in the U.S. 2013 Recap and 2014 Outlook,” released in January, “We expect Chinese interest in U.S. assets to remain strong in 2014 because of aggressive economic reforms in China, a more liberal policy environment for Chinese outbound investors, and a positive outlook for the U.S. economy.”
The American Presence in China
The Chinese Communist Party (CCP) has made some moves toward opening up Chinese markets to foreign interests. This marks a fundamental shift in in the party’s previous position. Currently, the China-U.S. Bilateral Investment Treaty (BIT) is under negotiation. BIT would allow American companies to more freely invest in a variety of Chinese industries, ideally. American investors would be allowed to invest in the key industries of car manufacturing, financial services, transportation, chemical manufacturing and energy production. In return, Chinese investors would have access to more investment opportunities in the U.S., aside from any that would threaten American national security.
Clearly, the Chinese investors are already here. The ability to reciprocate more fully would allay fears about too much Chinese capital represented in American companies. The BIT would protect investors from expropriation of assets or assure payment if assets are expropriated. (Expropriation occurs when a government entity seizes privately held assets it deems necessary for the public interest). In many ways, BIT would allow for better ease of cross investment. American investors would not face any restrictions that Chinese companies would not face, in theory.
As it stands, many iconic U.S. firms have already poured billions into China. General Motors and Ford have spent billions of dollars over the last decade on Chinese factories and other means of production. Starbucks and Coca-Cola have long viewed China as an under-exploited market.
As market experts like Bradley Reifler point out, a more open market for cross investment would be in the best interests of both countries. Markets are becoming more global, not less. Allowing investments to only go one way has the potential to create an unnecessarily prickly business relationship among investors.
There are still real obstacles to investment in China, although the U.S. spent $50 billion on direct investment in China last year. Even with very deep pockets, American firms confront competition from Chinese firms, political unease and a maze of regulatory restrictions, consultants like Bradley Reifler noted.
Not all the obstacles come from the Chinese side of the equation. American firms are wary of China’s stand on issues of cybersecurity, intellectual property rights and fair currency exchanges.
Additionally, most of those voicing concerns come from inside the American Senate. The Senate has to approve any bilateral trade agreement by a two-thirds vote. If a trade agreement meets resistance in the Senate, it will in all likelihood fail.
There is international concern over the CCP’s sincere commitment to economic reforms. With more economic freedom, there is concern that Chinese citizens would demand more legal protections under the law. Such agitation would undermine the position of the CCP. If the party feels its authority being eroded, economic reforms may not just stall but scale back.
More open foreign investment in China faces other challenges. China and Japan are still engaged a dispute over air-defense identification zones that could have a chilling effect on investments among the U.S., China and Japan. The growing sense of Chinese nationalism is also worrying to some investors.
However, Chinese and American cross investment is in the best interests of both countries, as investors like Bradley Reifler have noted. Chinese investors need opportunities as their economy has recovered from the international recession. Chinese investments in the U.S. keeps their real estate market from over-heating and creates tens of thousands of American jobs.
American investment in China allows U.S. firms to expand their bases of operations, creating more jobs for the rapidly growing Chinese population. Revenues from these markets aid the recovery of the American economy, underpinning the beneficial nature of mutual investment, as Bradley Reifler explained.