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Jose C Bolivar Dr. Ueng Finance Spring 2014
Chinese Investment in the US, and its effects on the local economies
Introduction
In a 2010 report by Columbia University titled “Chinese multinationals gain further momentum,”
found that 16 of the top 18 Chinese assetholding companies in the United States are stateowned
enterprises (SOEs). China is known for its centralized management system which has been key to their
rapid expansion. This is a strategy position, which has helped its business and economic plan. Most
companies are administer and regulated by the Chinese Assets Supervision and Administration
Commission, under the control of the State Council. A couple of these companies have become more
independent in their governance mechanisms, while also establishing individual market oriented
strategies. The Chinese State has acknowledged that in order for Chinese firms to be competitive in a
global economy, firms must adapt to international standards.Many of these Chinese multinationals during
the last decade have increased their international expansion, establishing their economic power in the
United States. This report will analyze the impact on investment in the local and national economy.
A year ago journalist Xu Zhijun posted a picture of a clean plate of food on Weibo, China’s
social media version of Twitter. Xu Zhijun moved from a small town to Beijing and noticed the high
amount of food that went to waste in the city. His picture posted on Weibo, showed a caption that read
“Operation Clean Plate.” The rapid industrialization and economic growth of the last decade in China
has brought in many benefits for the Chinese people. In major industrialized centers, the Chinese people
enjoy the fruits of this rapid industrialization and economic growth. Resourcefulness of food resources is
a good measurement of the state of an economy and its people’s financial well being.
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The Following graph provides a visualization of the increasement of Chinese disposable income
in the last four decades.
In 1980, China’s average of disposable income was $280, a decade later the disposable
income increased to $316. At the turn of the century it had increased to $760, by 2012 the disposable
income was an average of $3000. It is important to note that due to the centralized and untransparent
nature of statistics provided by the Chinese State, it is very difficult to have accurately numbers
regarding the average disposable income. As of now, there is not an official recognized “middle class” in
China. Helen Wang, author of The Chinese Dream: the Rise of the World's Largest Middle Class
and What It Means to You, notes that "a rule of thumb is that a household which uses a third of its
income for discretionary spending, should be considered middle class. The “unofficial middle class” is
gaining strength in its purchasing power and its new attraction to western consumerism. This “unofficial
middle class” is rapidly changing the face of China. After Xu Zhijun posted the picture on Weibo,
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“Operation Clean Plate” started as a movement started to eliminate waste across all urban
areas.Consumption has been an influential variable in increasing the waste across China.
Consumption index is used to measure the strength and vitality of an economy. This index can
be measured in order to provide a different and unique look at an economy. This paper for its analysis,
will be focusing on consumer confidence as it relates to the consumer optimism of the state of the
economy, and individual confidence of their individual financial situation. The graph below, provides a
visualization of how China measures against the global average, from years 2012 to 2013.
Chinese consumer confidence has decreased from 102.90 in October of 2013 to 98.90 in
November of 2013. This index has been reported by the National Bureau of Statistics of China. From
1991 to 2013, the consumer confidence has average 109.90; in September of 1993 it reached an all
time high of 124.60 and an all time low of 97 in November 2011. The consumer confidence is an index
of 700 consumers over the age of 15 years old, from 20 different Chinese cities, from the provinces.
This composite index covers the consumer expectation and consumer satisfaction index, thus measures
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the consumers' degree of satisfaction about the current economic situation and expectation on the future
economic trend. The Index measures consumer confidence on a scale of 0 to 200, where 200 indicate
extreme optimism, 0 extreme pessimism and 100 neutrality. For the last three years, Chinese Consumer
Confidence has been relatively higher, than its American and European counterparts. The Following
graphs, shows the changes in regards to Chinese consumerism in the last few years and their purchasing
power of consumer goods.
www.citydata.com
Xu Zhijin, the reporter that started “Operation Clean Plate” comes from rural China, a part of
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China that has not reaped the benefits of the dragon economy. The dragon economy has brought in
many benefits to the overall Chinese economy, but such benefits have not been distributed across the
board, and across all the levels of society.
China has an economy that is highly unequal and mostly dominated by the state. China’s political
system and contemporary history has contributed to this inequality. Despite economic reforms and the
liberation of the goods markets and the labor market, the state continues to hold a tight grip over most
of the financial institutions. The Chinese financial sector withdraws money from the foreign exchange
earnings and from household savings, then channels it to stateowned firms controlled by the central
and/or local government(s). Having limited options, Chinese households must deposit money in the state
sponsor banks. In today’s China where there’s inflation, depositors earn a negative real interest rate
from these financial institutions. These financial institutions fix deposit rates at a level that is below
inflation. Meanwhile, real estate developers with political connections, and large stateowned enterprises
can borrow money at interest rates that are near zero in real terms. In effect, the Chinese financial
system channels wealth from ordinary households to a small handful of connected insiders and
stateowned firms. The following graph shows the contrast between the set rate and the real interest rate
of the last few years.
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As we come back to the Chinese restaurant at the beginning of this section, there is a lot of
waste across many Chinese urban areas, areas who have benefited from the progress of the dragon
economy. Xu Zhijun comes from the rural part of China, where this progress has not yet exploded as in
many Chinese urban areas. He notices the waste, and remembers the stories of his parents regarding the
times of famine that the people of China lived through. Xu Zhijun seeks to make a change, but these
new powered consumers are just experiencing capitalism. Waste is a product of a market oriented and
free economy. Waste is factor of the power that the consumer possesses regarding purchase, to
consume is also to waste. Waste is an indicator that an economy is healthy, that the consumer has
power of purchase that the consumer is willing to consume and is confident in doing so. The waste in
China, represents that the consumer are confident about the future prospects of the economy.
At a glance, one can conclude that the Chinese government is acting on the best behalf of the
Chinese consumer. As Chinese firms look for new opportunities to expand abroad and invest in key
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sectors which will help serve the consumer demand at home. Actions by Chinese firms trouble
Washington, trouble the politicians, trouble the US government. This has become a complex relationship
between the Chinese consumer, the Chinese state, the American consumer and the American
government.
Around the same time a group of 15 bipartisan US Senators send a letter to the Obama
Administration, urging for the Administration to consider the review of the sale of Smithfield Foods Inc
to Chinese privately owned Shuanghiu International. Smithfield is currently the largest pork producer
and processor of pork in the US, operating in 26 US states. It also has operation in Europe and
Mexico, it workforce worldwide account for 46,00 employees. Shuanghiu is the largest meat producer
in China.
Throughout the majority of the US economic history, the nation has welcomed trade and foreign
investment with open arms. The US and Chinese economic relationship is quite complex.
It is important to note that the US has never been in a position where its largest creditor, has also
actively sought investment in its economy. This complex relationship has created a very difficult strategic
partnership of economic growth for parties, specially placing the world’s largest economy (US) in
between a rock and a hard place. The continuing investment in the US by Chinese investors in industries
that have been predominantly domestic firms, has created a hostile environment at the federal levels of
economic decisions. One of the predominantly topics regarding this investment, is the centralized
strategic and managerial vision of the Chinese government.This active investment in the US by China,
has raised the question of and if, a state owned and state sponsor enterprise, should have the
opportunity to invest openly and freely in an open and free US market.
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For the last 12 months, holdings of US debt by foreign entities have increased by $450 billion, from
55.217 trillion to over $5.6708 trillion. The ten largest foreign holders of US debt are: China ($1.2649
trillion), Japan ($1.1103 trillion), Caribbean Banking Center ($273.1 billion), Oil Exporters ($272.7
billion), Brazil ($252.6 billion), “All Other ($222.6 billion), Taiwan ($186.7 billion), Belgium ($185.7
billion), Switzerland ($183.3 billion), United Kingdom ($163.4 billion). The Chinese portfolio of US
debt has increased 8.63% over the past 12 months.
Local Economy View: A Focus on North Carolina
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“The N.C. Department of Commerce, the North Carolina Biotechnology Center, Longistics, the
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North Carolina China Center (NCCC), the China Investment Promotion Agency (CIPA), Calvert
Research, LLC and The Hamner Institutes for Health Sciences, under its new HamnerChina
Biosciences Center,have announced their joint participation in the N.C. China Global Gateway Platform
for Investment and Economic Development (the “Platform”) to promote job creation and trade in North
Carolina and China. These partners will cooperate in the development of a new model to attract
investment to NC. This will also support and bolster the foreign competitiveness of N.C. exports with a
process that can be replicated among many economic sectors statewide. Goals for this publicprivate
partnership include developing an easily understandable and functional Platform which increases
economic development and job creation, accelerating life science development in North Carolina and
China, and establishing a showcase Platform for global life sciences, technology, business and economic
development. (Hammer) “China is North Carolina’s second largest trading partner and continues to
grow,” said Commerce Secretary Keith Crisco. “The establishment of this Global Gateway Partnership
will lead to more jobs, increased exports, and new business opportunities. This innovative approach
can pay big dividends to all participants in the long run.” (Hammer) Former Governor Bev Perdue of
North Carolina, spent two years working, building and encouraging a relationship to increase trade and
investment with China. North Carolina has created a China Advisory Council, a group of leaders and
government officials to provide advice on how better established good relationships with Chinese
government officials. North Carolina also established an office for investment and trade in Shanghai.
North Carolina is investing in building and securing relationships that will benefit North Carolina in the
long term. In 2012, China made a total of nine investments, second only to California, which had ten. In
2012, Chinese investment in N.C. total $47 million, all of the investment included greenfield projects,
which created jobs in the state. Industries such as energy, automotive, electronic equipment, and
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information technology benefited from the investment. The partnership development that N.C. has
established is starting to reap benefits, Masterwork USA Inc, a Tianjin manufacturer of print finishing
equipment is set to established its US headquarters in the state. The headquarters will include, sales and
customer service center located in Charlotte. 200 new forecasted jobs will move to Charlotte, as
Pactera Technology International Ltd, a Beijing based consulting firm relocates to the US. Chongqing
RATO Power Co. Ltd. and its Denver Global Products subsidiary, would be investing $30.2 million in
a Lincoln County (N.C.) distribution and assembly center for RATO engines and vehicles. By doing
such, Chinese companies are able to have higher sales margins, due to distribution centers and
aftersales service and being able to use the slogan of “Made in the US.”
Due to the benefits that this outside investment is bringing in to the region, N.C. and the
Charlotte region see that for future development and economic growth, Chinese investment will become
vital. The region must seek assistance from established Chinese firms, to help them persuade new firms
to invest in the region. Encourage new entrepreneurs by highlighting the value that Chinese families have
in terms of lifestyle in N.C. and continue to create channels of civic and cultural engagement with China.
FDI in the US can provide both benefits and liabilities to the economy. When FDI comes to the
US, it first affects the local employment. This can be by increasing the employment, if the firm that is
making the investments decides to revitalize the business, or decrease employment if the investing firm
decides to make necessary cuts for the benefit of the business. In 2008, foreign firms employed 6.3
million people in the US, 40% of the 6.3 million, were employed in manufacturing. Also, foreign
companies tend to pay more to the US employee, in 2008 foreign payrolls in the US for US employees
were an approximate of $452 billion, with an implied annual average of $72,000, this number is in fact
much higher than the median annual US compensation. Chinese employers in the US remains small,
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according to the BEA, Chinese employees employed around 2,500 people in 2008. This number has
dramatically changed and increased in the last two years, as Chinese investment has shift its focus to
more greenfield projects, focusing more on manufacturing and long term growth for the local economies.
This has resulted in insourcing, creating jobs back in the states. Offsetting the previously outsourced of
jobs of the last few decades. This insourcing helps local economies, and it provides it workforce, who
have an asset of skills and know how workforce, which these new companies are seeking.
FDI can also add another positive aspect to the local economy, in terms of research and
development, providing new training to the workforce and introduction on new management methods
that tend to be more effective in some management areas. In September 2007, Sany Heavy invested
$150 million in the US, establishing its American Headquarters in the US. Sany Heavy is a Chinese
heavy machine manufacturing company located in Changsha, Hunan Province, China. Sany Heavy
estimated that the plant was going to create 200 jobs, with an estimate of 600 jobs in the next decade.
In October 2011, Sany Heavy made an additional investment of $25 million on the expansion of the
existing facility. Sany Heavy will be adding a research and development center, approximately creating
additional 300 jobs, with the promise to hire 300 new mechanical and hydraulic engineers. A median
salary of a mechanical engineer in Atlanta, GA is of $65,000 a year.
Following the example of North Carolina, the American public is gaining more interest in the
microeconomic aspect of Chinese investment. Specially regarding how the investment will benefit the
local economy in terms of jobs, infrastructure, and local competitiveness. ]The local economies such as
North Carolina are not as interested in the national security or the effects of the broker relationship
between China and the US, local economies focus first, on job creation.
Going Out Policy
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The macro view of Chinese foreign direct investment comes in regards to the positivity, that
such investment brings to the market and especially to the consumer. The main of concern in the macro
view of the US economy regarding Chinese investment is national security. The Chinese government
made the decision that economic expansion and common development are of great importance to the
state. The benefits of this decision will help China find needed resources, expansion of markets for its
exports of both goods and services, as well as to promote multinational companies and brands. This will
let China invest in other economies, by establishing Chinese factories, promoting economic development
in the host economy, providing jobs and ultimately achieving market diversification. In the eyes of the
Chinese government, this will help in trade promotion and help reduce trade friction with partner
economies.
In 1999, the CPC Central Committee (Central Committee of the Communist Party of China)
proposed the implementation of the Chinese “Going Out” Policy regarding investment in foreign
economies. This policy has yield results for China, success stories can be found in companies such as
PetroChina (oil and gas), Sinopec (oil and gas exploration and refining) , Huawei (telecommunications),
and CIMC (transportation). These are few examples of companies that have established themselves in
the international market. The implementation of this policy has not been as successful as hoped. One of
the issues that slows down the process of foreign investment is bureaucracy. Currently there are many
layers in existence that slow down the process for a Chinese company to receive the necessary
approval to invest abroad. The second obstacle comes in regards to the “abroad business environment”,
adapting to new ways of running a business, and following the host economy business laws and policies.
Chinese companies face obstacles when it comes to regard of international establishment. Due to
lacking recognition and brand awareness, the companies willing to invest abroad, are limited in the
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options where their investment is welcomed. One of the last issues is the lack of smart investment and
research before an investment is made. Many of these companies end up failing for lack of
preparedness, readiness and market competition in the entry market. In order for China to continue to
expand its international investment, the “Going Out” policy must be revised. This revision includes
strengthening the companies’ organizations from its service and management, improving and upgrading
current business policies, reform the bureaucracy regarding the implementation of the policy. By
adjusting the following criteria, Chinese companies will be able to better succeed, in terms of their
investments abroad.
The CPC Central Committee affirms that there are several reforms needed. Streamline the
process of approval for foreign direct investment. The state should implement a model for companies to
follow, “who invests, should make the decision, should gain the benefits but also bear the risk.” The
state should adopt a policy that helps and advises companies regarding their investments abroad. How
to fulfill international agreement is a subject that must be addressed. Companies should hold the
knowledge of how to use their rights and protect Chinese interest abroad. Companies should continue
to support domestic industries, industries that have a comparative advantage due to their domestic
production capacity. Diversification should be the key when promoting the marketing of the product
when establish abroad processing centers, marketing, service networks and product research.
Companies should establish clear goals for their internalization, develop cooperation for resource
maximization, promote diversification of imports, and support channels of open trade. Companies
should focus on strong “core competitiveness,” by improving their corporate governance with
international talent, meet international guidelines regarding foreign exchange, expand lines of credit and
improve insurance coverage.
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Chinese companies should be able to effectively hedge risk. The state should promote the
“Foreign Investment Law,” and other such laws and regulations, in terms of regulation and protection of
international investment. Companies should focus on standardizing their decision making processes, in
order to avoid blind investment on mergers and acquisitions abroad. Enterprises should not engage in
overseas futures, equities, foreign exchange and derivatives trading speculative, these are all high risk
business. These are all high risk business and hedging is challenging and complicated. Companies
should establish and improve business risk assessments, create prevention mechanisms and risk controls
methods. It is also important to prevent money laundering. Embezzlement of state assets should be a
high priority as it will reduce the capital valuable, which is not in the national interest. The state should
seek new partnerships for economic integration with other economies; the state shall also provide
support to companies seeking to invest abroad.
Between the years of 1980 and 2000, it the first stage of the “Going Out Policy.”, Was
implemented China’s cumulative overseas investment was less than $30 billion. During the two decades
the second stage of China’s “Going Out Policy” started in 2000 to 2008, when it became a national
priority and strategy. In November 2001, when China enter the WTO (World Trade Organization) its
investment overseas grew steadily. After the financial crisis, China’s investment grew in size and
numbers, in 2008 that investment surpasses the cumulative amount of 1980 to 2005. By 2011, its
overseas investment reached a total of $365.2 billion, expanding to 178 countries.In 2007 China’s
investment abroad accounted for $26.51 billion, by 2008 it reached $55.91 billion, a 110 percent
increase. By the end of 2009, investment abroad had reached $245.75 billion, compared to less than
$100 million in 1980.
During the global financial crisis, China created the CIC, China Investment Corporation. The
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CIC invested $5 billion in a stake at Morgan Stanley. The CIC justify its investment, as an opportunity
that opened due to the global financial meltdown. This investment is “strategic” in nature. The success of
the investment is not based on the shareholder’s value, but most importantly based on the value of for
the national stakeholder. This investment is important in maximizing the strategic economic growth and
influence of the Chinese economy.
The Chinese and US relationship its simply complicated. Due to the demand of goods by the
US and the unrestricted debt of the American household, it has created a perfect climate for the present
US and China trade relation. In order for short political gain for both sides the present situation
regarding their investment and trade relationship, continues to be the same. In the US by providing the
consumer more options, and in China by creating a new economic climate and employment.
Economic openness offers many benefits, specialization, reduction in production cost and
competitive prices for the consumer. This allows for businesses to operate more efficiently. Global
integration offers the US many benefits, economic specialization, increase competition in the
marketplace and allows greater economies of scale. Investment provides healthy competition in the
marketplace. In order for the economy to benefit from this direct investment, local operation such as
manufacturing or/and services also need be available in order to bear the fruit from the investment.
For the US consumer, increase competition brings competitive prices, more options to select
from and better quality of services/goods. Foreign investment also brings benefits to the sellers, as the
competition for the assets that their own increases in value.
In 2011, Chinese Company Haire had the world’s largest market share in home related
appliances. Haire sells consumer home appliances, mobile phones, computers, refrigerators, air
conditioning, etc. In 2000, Haire established operations in Camden, North Carolina, by 2002 it moved
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its US corporate operations to Midtown Manhattan. Haire America is a success story of Chinese
investment abroad. It has been a winwin situation for all parties involve. The Chinese consumer and the
American consumer is able to benefit from a higher value product with a lower price tag. The Chinese
company was able to established itself as a key and predominant player in the industry to which it does
business in. Now, Haire minifridges are a standard in university's dorms and mini bars across the US.
In 2005, CNOOC (Chinese Petroleum) did a bid to take over Unocal Corporation. After
several debates, the House of Representatives of the US Congress voted to refer the take over to
President G.W. Bush in regards to matters of national security. CNOOC withdrew its bid after the vote.
CNOOC offer at its initial bid of $16.5 billion to purchase Unocal, Chevron later acquired Unocal for
$17.9 billion. Even if the Chinese bid did not go through due to the perceived risk of national security, at
the end, the Chinese bid helped Unocal shareholders by increasing the value of their shares.
Inward investment also benefits not only the US consumer and the Chinese consumer, but it also
provides a mutual benefit for both corporations. IBM had a weak performing area in their sales of
personal computers. Lenovo purchased IBM’s personal computer division; this helped IBM relieve
itself from a weak division and helped Lenovo with the knowledge and technology that was needed.
The Committee on Foreign Investment in the US (CFIUS) is interested in national security
threats and not on negative economic news that will negatively affect the US economy. The CFIUS is
chaired by the Secretary of the Treasury and has 16 other members from across the US bureaucracy,
including State, Defense and Commerce Departments .
One of the issues that the CFIUS focuses on is in regards to “tariff jumping.” It happens when
an overseas company establishes a division or a manufacturing facility in the country where it wants to
avoid certain tariffs. For example, if a Chinese company wants to avoid tariffs, it will establish a new
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operation in the US, manufacture or sale its products or services and reap the benefits of having a
location in the US and benefit from the tariffs restrictions. “Reorganization” is a second point that might
bring worries regarding Chinese investment and takeover of industries. If Chinese companies invest or
takes over American industries, the thought is that the high skilled jobs and high paying jobs will leave
the US and the low skilled, low paying jobs will remain at home.
On February 21, 1972, for the first time a United States president visits China. President Nixon
made it a priority of his Administration to open the channels of communication between the US and
China. At the conclusion of the trip, the administration offer the Shanghai Comunique, setting the stage
for an openness of trade and communication. The AmericanChinese commerce started before the
United States became independent. It was Chinese tea, that was being taxed by the British that was
emptied in the Boston Harbor for the famous Boston Tea Party. During the 1920, Chinese banks had
direct banking operations in NY. By the eve of World War II, China controlled 47 US enterprises. Due
to the isolationist approach taken by the Communist party of China, these commerce relationships
became stall.
During the 2000s, China had enormous trade surpluses, the Chinese state required companies
to bring back the foreign exchange so that it could be converted into the yuan. During these years, the
Chinese state began investing in US government securities, which lead us to our present time. Now,
China is the largest holder of US debt, In 2009, China held at a minimum of $1.4 trillion in US debt,
$80 billion in corporate equities and $16 billion in corporate debt.
Focusing on China’s Going Out Policy, by 2004 its FDI focused mainly on energy, minerals and
other sectors important to a developing economy. This has dramatically changed, in the last two years
Chinese investment in the US has grown to more than 130%. Due to the lack of knowledge and skills
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that Chinese companies have, their FDI is focused more on being the broker, rather than directly
investing. It is difficult for Chinese executives to manage companies in the US, due to the different
regulations such as labor, employee rights, environmental regulation etc. In 2009, the BEA (US Bureau
of Economic Analysis) placed the accumulated Chinese FDI stock in the US at $2.3 billion.
Due to the lack of transparency that the Chinese state has regarding their investments. It is
difficult to have reliable numbers of the amount of investment that the Chinese state does. The data that
will be presented is based on professional databases, media and press reports.
There are few examples of Chinese companies acquiring a company for its technology and then
shutting down operation in the US. An example of this behavior happened during the Clinton
Administration, when Magnequech an Indiana based company was purchased by Cox, a company that
had close ties to the Chinese government. After three years of the take over, the last facility was closed
and the assembly was moved to China. These examples are rare, because what attracts the Chinese
firms to invest in the US is the technological jump that the US companies have. Due to this, the US
workforce has the knowledge and skills necessary to use the technological assets that the company has,
something the the Chinese workforce abroad does not have.
Potential security threats that are emphasized when discussing national security are: control over
strategic assets, control over the production of critical defense and transfer of important technology.
Strategic assets include pipelines, ports, airports, defense industries, technological advancements.
National Aspect
The largest threats that the US economy faces, is the threat of interference to its economy. The
special case of China and the US relation is in regards of the potential power that the China economy
will have. First, no nation in the history of US economic and political dominance has been on track to be
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able to surpass the US GDP in the last century. It is estimated that in two decades China will do so,
changing the international economic landscape. Second, the US and China international relationship is
not friendly. China is not working towards having an eye to eye relationship with the US, China is
heavily investing in its defense for the sole purpose to balance the US military around the world. Third,
the national security risk of state ownership in industries and the real reason and goal that the owner of
the firm has regarding its goals. Fourth, China has a weak trajectory of export control, especially in
regards to controlling exports to not so friendly nations, such as Iran and North Korea. Fifth, threat of
espionage of China in US secrets.
Due to the lack of transparency of the state and the untraceable amount of investment
located in tax heavens, it is difficult to correctly estimate the amount outward investment from China.
The only tractable amount that is provided by the state is a report of approved government investment
projects. This report is generated by the Chinese Ministry of Commerce (MOFCOM). The United
Nations Conference on Trade and Development (UNCTAD), relies on the MOFCOM report to track
FDI of China. Industries such as oil and minerals or telecommunications, are required to remain under
the government control. The Chinese government is often in charge of appointing the executives at these
firms and finding way to finance the growth through the use of state banks. The evolution of China's
Outward Investment through the years has been closely correlated to the strategic vision of the state.
In the first stage of Chinese outward investment it includes the years between 1979 and 1985,
when China opens its doors to the world. During this period, only the state owned companies,
provincial and municipal economic enterprises were allowed to invest overseas. In this period, 189
investments were approved by the states, to an estimated amount of $197 million. The second stage is
from 1986 to 1991, during this period the government allowed for more economic liberalization. This
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allowed for more nonstate firms to be able to able to established investment abroad. The companies
had the opportunity to invest if, both of them had the sufficient capital and foreign partner. The third
stage happened between 1992 to 1998, this period was marked by the Asian financial crisis. Due to the
lack of management expertise, corruption and institutional weakness, several Asian countries suffered
many losses. Due to this the state tightened the approval process for investment abroad and began to
closely monitor investments over a $1 million. During this time the outward invest was able to level off,
at the end of the period it was still able to reached $1.2 billion in total investment. By the year 1999, the
“Going Out” policy was established and legislation was approved to help the strategic vision of the state.
In October 2004 the National Development and Reform Commission (NDRC) and the ExportImport
Bank of China (EBIC) released a jointly report to encourage investment abroad. The report contained
four specific points that are tied to the strategic vision set by the state. First, to invest in resource
exploration, that will help offset the domestic scarcity of resources. Second, promote projects that
export domestic technologies, products, equipment and labor. Third, oversee a research and
development center, in order to utilize international advance technology, managerial skills and people.
Fourth, explore mergers and acquisitions to add to the competitiveness of Chinese firms. As part of the
strategy, the state offers grants for export tax rebates, financial assistance and foreign exchange
assistance for investment in overseas markets. The strategic vision encourages Chinese companies to
enter into joint venture or purchase companies that will help provide the “technological knowhow.” By
strategically investing in these firms, the Chinese companies benefit by absorbing the top technology
available and benefiting by taking “leapfrog” in the stages of the development of that technology.
Mergers and acquisitions are a small part of the overall outward investment of China. China looks out
for investment that are “bargains” as an ease to entrance in a develop market. Using this approach,
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Chinese companies need not to invest in rebranding or investing in their brands, as they can easily
acquire brands that are well known to the market by purchasing them, using the state backed finance.
Successful brand takeovers that are recognizable are Smithfield and the IBM Thinkpad.
China Minsheng, the first private commercial bank in China invested a 9.9% stake ($317
million) in UCBH Holdings, in 2007. China Minsheng was an 11 year old bank at that time, and this
was the first major American investment that the bank had done. During that time, one sole member of
the board of directors voted against the acquisition of shares of UCBH, citing that the bank might be
susceptible to heavy lending by the construction sector and real estate markets, making it vulnerable to
the upcoming financial crisis. China Minsheng move forward with the acquisition, by 2009 the California
Department of Financial institutions was closing down the bank. Later that year Minsheng requested to
take over UCBH, but due to the slow process of approval by the Federal Reserve, the bank closed
down its doors. If the takeover would of have been approved, the US taxpayer would have save $1.7
billion ($300 million in TARP and $1.4 billion in FDIC). When Minsheng first approached the
investment in UCBH it was blindsided by a bank that was making profits above the average of the
industry. “ UCBH recorded a net profit of $101 million in 2006 and it has logged a 26.9% annual profit
growth rate over the past four years, among the highest for an American bank.” (Forbes) It was familiar,
as it was the bank of many Chinese Americans, and its plan to expand in China by purchasing Shanghai
bank, made it a sound investment. Due to lack of oversight and direction, Minsheng Bank ended up
with losses and an unclear direction of how to enter the American financial market. The area of
expertise of UCBH were mortgage and real estate investments, an industry that Minsheng was not very
familiar with. If Mingheng would of have partner and invested in an institution that shared its expertise in
trade financing, a better investment result would of most likely to happened.
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Expansion of brands has been a key in determining the Chinese investment in the US. in 2007,
the largest Chinese shirt and suit manufacturer Youngor entered into an agreement to purchase
American “Smart Shirts.” This would help Youngor increase its retail arm, as 95% of Smart Shirts
products being sold in the US and Canada, and the rest in Europe. “The acquisition of Smart Shirts will
give Youngor Group a larger retail network overseas and bring extra annual sales revenue of $360
million, including $12 million in net profit, the Chinese firm was quoted by the 21st Century Business
Herald as saying.” (People’s Daily) By 2011, Smart Shirts merged with Sunrise Textile Group under
Youngor, to form a stronger, leaner and more productive company. "By becoming one larger
organization instead of two related operating groups, we will become a stronger, more powerful
competitor in the international marketplace. The new group will be one of the largest textile and apparel
companies in the world that is truly vertical and global, from cotton farming in XinJiang to the marketing
and distribution of garments in the United States.”(Marketwired) The new merger will bring an annual of
$5 billion in sales to Youngor.
In 2008, WuXi Pharmatech announced that it will be purchasing Minnesota based Apptec
Laboratory Services. This acquisition allowed WuXi to gain an immediate entry to the US market.
Apptec specializes in cell therapy bioproduction. WuXi is the leading Chinese based pharmaceutical and
biotechnology research and development. In 2008 WuXi had a market capitalization of $1.8 billion.
WuXi acquired Apptec for $151 million, its most valuable contribution, easy entry to the US market.
By 2007, Datascope had a total revenue of $161.3 million, Datascope’s patient monitoring
system. Mindray Medical International Limited entered into an agreement to acquired Datascope’s
monitoring system, placing them as the third largest international provider of patient monitoring system.
One of the strongest assets is that Mindray will acquire os the strong brand and reputation for its high
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quality products and services. Mindray will also benefit from the established direct sales and services
channels of Datascope has in the US and Europe. Datascope was acquired for a total of $209 million
in March 2008. Mindray plans to continue its manufacturing in the US and continue its research and
development investment in the US.
By 2008, the CIC (China Investment Corporation) had made a number of investments in the
US that had not provided positive returns. "Because of the subprime crisis, the value of financial assets
in the United States has fallen to a more reasonable range, which creates a fairly good opportunity for
China to invest," said Li Ruogu, president of ExportImport Bank of China. (Reuters) In an article to be
published in the International Economic Review, a Beijing academic journal, Li said China urgently
needed to invest abroad to diversify its huge foreign exchange reserves, which exceeded $1.6 trillion at
the end of February.
CIC, which separately manages $200 billion, invested more than $100 million in Visa's initial
public offering. China Life insurance then invested $260m million in Visa, raiding the IPO to $17.9
billion, the largest in that time. This was a different contrast from the losses that the CIC had of $3 billion
in the Blackstone. If Chinese regulators had approved the planned $1 billion investment in Bearn
Stearns in December of 2007. The CBD also had a investment that was not approved, failing to have
to go ahead to invest in Citigroup. "I think it's important to remind you that Chinese companies need to
be more cautious and more careful (in investing abroad), because we really have no experience in this
field," stated Guo Shuqing, Chairman of China Construction Bank. Chinese professor in Tsinghua
University stated that due to the financial crisis, Western governments are more welcoming to foreign
investments. "We should invest for influence and for the right to know, not for shortterm financial
gains," Li stated, a member of China's top political advisory body. Due to the lack of expertise and the
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bureaucracy when green lighting and investment, Frank Gong, chief China economist at JP Morgan, “the
danger is that Beijing, in a futile attempt to time the market and thus minimize potential losses, will drag
its heels in approving planned investments.” "The risk definitely is that Chinese policy makers will move
too slow and China will miss out this onceina century opportunity," Gong told reporters. (Reuters)
The CIC moves to invest in J.C Flowers a firm started by a former Goldman Sachs’ executive.
This fund would invest in US financial assets. The CIC will become a limited partner in the fund, having
an 80% stake. This is the first private equity fund that the CIC will be investing, continuing the plan set
forth by Beijing to diversify. This also makes J.C. Flowers the first private equity firm that is managing
funds from the CIC. The CIC also request a more riskier approach for J.C. Flowers. Private equity
funds are easily asked to invest one or two percent in the funds, but the CIC requested to for J.C.
Flowers to be more bullish and invest ten percent. The CIC continue its investment in firms, including
Blackstone, Morgan Stanley, Blackrock, Oak Tree Capital, and Morgan Stanley.
The CIC invests in AES, part of their .energy business. The CIS will acquire 15% of equity at
AES, and will be able to nominate a director. CIC invested $1.58 billion for that stake. AES has nine
distributions around the world, with more than 11 million customers; its energy includes: biomass, diesel,
gas, hydro and oil. For the first time in the history of the US, a Chinese company has a stake in an
American energy development. The National Offshore Oil Corporation (CNOOC) was able to acquire
some of the leases from the Norwegian Statoil. Statoil is a major player in the Gulf of Mexico, as it has
acquired many leases in the last past years from the US government. Usually when it comes time to
develop, the holder of the lease offers partnership opportunities in order to hedge the risk. CNOOC
was able to outbid other bidders. This marks a significant move forward in the entry of the US market, a
few years before CNOOC had lost a bid for Unocal.
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By the end of 2011, China’s outward investment fell from $23.4 billion to $16.3 billion. In
between 2009 and 2011, US energy companies have lure Chinese companies to invest and become
partner with them, including CNOOC, PetroChina and Sinopec. Chinese companies have become
smarter regarding their partnerships and investments. Windows of opportunity due open, opportunities
which benefit both partners in this case Chesapeake and Sinopec. As Sinopec looks to increase its
global competitiveness, refining and distribution. After learning from the Unocal experience, Sinopec is
strategically moving towards acquiring assets, but not complete ownership.
Conclusion
Journalist Xu Zhijun had it right when he posted that picture of a clean plate on Weibo. China's
dragon economy is definitely changing the way many Chinese consumers behave and consume. It is
also opening new windows of opportunity to many Chinese businesses, as they seek better way to
better serve the needs and wants of the increasing number of consumers at home. China’s “Going Out
Policy” can simply be described as an strategic move of market penetration for Chinese investment in
the US. At the federal level of the US government, the main concerns regarding this investment is
whether or not the national economy and national security is at risk. This notion is valuable as recent
reports regarding the increase number of cases regarding Chinese espionage in the US. Overall, Chinese
investment brings more benefits directly to local economies. Chinese investment has been able to
relaunched many dying brands, created new jobs and has helped provided better products and
developments to the consumer. These investments are being fueled by the savings of the Chinese
people. These savings are fuelling the CIC and the loans for abroad investment for Chinese companies.
If the continuum continues, meaning that the Chinese consumer continues to save (this can be in the
short run, as it is not feasible for the long run), there will be enough funds for continuing investment
Bolivar 27
abroad. China will continue to follow its strategic vision and as long as there is opportunity in the US to
invest, the investment will be welcomed with open arms.
Investment will create new jobs, open new factories, outsource a number of sales channels to
the US and rescue many business divisions of large corporations, which have failed in the competitive
market.
Data Review
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