Quantcast

Beijing Inc?: The Chinese Aren’t Coming—They’re Here

This past Labor Day, a great many of the sausages consumed at cookouts across the country came from Smithfield Foods Inc., formerly the US food giant, but for the past year a wholly owned subsidiary of China’s Shuanghui International Holdings. Shuanghui paid $4.7 billion for Smithfield, whose operation spans hog farms and pork processing facilities in more than a dozen states, including Virginia, Maryland, North Carolina, and Wisconsin. The deal was China’s largest single investment in the United States to date, and helped boost Chinese mergers, acquisitions, and “greenfield projects” (companies setting up their own factories) to a record $14 billion by the end of 2013. Despite bilateral tensions over cyber espionage, Chinese territorial disputes with America’s allies in the South China Sea, and the slow progress of China’s massive economic reforms—and despite increasing calls for more scrutiny from Congress—China Inc closed a total of eight hundred and seventy-nine major deals last year across the American map, from New Jersey to California.

The US Chamber of Commerce approved. “The evolution from a one-way to a two-way investment relationship is good news for the US and can help stabilize and deepen US-China relations,” it declared in a 2014 study on the continued flow of Chinese capital into the United States. The Obama administration clearly agrees that China’s direct investments can have a positive influence on the Sino-American bilateral strategic and economic dialogue, and has gone out of its way to attract it.

But the optimism is far from universal. The sharp expansion of Chinese investments has stirred considerable unease among US lawmakers on both sides of the aisle. There is concern about the possible damage to US security and economic interests and skepticism about China’s long-term intentions. Is this stepped-up financial activity an elaborate scheme to take proprietary technology out of the US, by moving R&D to China, with a resulting loss of American jobs? That these aggressive Chinese investing firms operate under an authoritarian political regime adds another layer of worry to what some see as a slow-motion financial invasion.

Read On

Roland Flamini's picture
Corridors of Power
Follow weekly commentary in Roland Flamini's World Affairs blog.

 

Earlier this year, the US-China Economic and Security Review Commission, established by Congress in 2000 to monitor the bilateral relationship, warned in a report that the huge, rich, and powerful Chinese state-owned enterprises “are not pure market actors and may be driven by state goals, not market forces.” It goes on to say “these entities are potentially disruptive because they frequently respond to policies of the Chinese government,” and thus Chinese investments can function as “a potential Trojan horse.”

Chinese investment is one issue that can unite an otherwise deeply divided Congress. In an early skirmish in 2005, Congress closed ranks to prevent the China National Offshore Oil Corporation from acquiring Unocal Corporation of California for $18.5 billion because of “security considerations.” The Chinese energy giant—the subsidiary of a state-owned Chinese petroleum enterprise—withdrew its offer, citing “unprecedented political oppression.”

Since then, the congressional focus has been on possible Chinese attacks on US technology. Recently, the chairman and the ranking member of the House Permanent Select Committee on Intelligence, Representatives Mike Rogers of Michigan and C. A. Dutch Ruppersberger of Maryland, took aim at Huawei Technologies Co., the Chinese version of Twitter, with more than one hundred and forty million users, and ZTE Corp., one of the world’s biggest smartphone vendors. The two congressmen reached across the aisle to recommend that “acquisitions, takeovers, and mergers involving Huawei and ZTE” be blocked, “given the threat to national security interests.” The lawmakers said they had “serious concerns about Huawei and ZTE, and their connection to the communist government of China . . . a major perpetrator of cyber espionage.”

In July 2010, fifty members of the Congressional Steel Caucus signed a letter to the administration calling for a thorough investigation of the Chinese state-owned Anshan Iron and Steel Group Corporation’s plans to invest in steel plants owned by the Steel Development Company of Mississippi, which, the letter said, could give the Chinese “access to new steel production techniques and information regarding American national security infrastructure projects.” And when three state-owned Chinese banks planned to open branches in the United States, Pennsylvania Democratic Senator Bob Casey wrote to then Federal Reserve Chairman Ben Bernanke expressing his concern that the banks “will use their state support as a way to underprice US banks that abide by US law.”

According to research prepared earlier this year for Congress by the Congressional Research Service, when the US subsidiary of China’s Wanxiang Group acquired A123 Systems Inc., whose products include special battery packs for US soldiers, “several members of Congress expressed concerns over the national security implications . . . as well as concerns that US government grants that had been given to A123 Systems in the past might end up benefitting a Chinese company.”

Such opposition has not stopped the trend that has continued this year, with real estate, high-tech, manufacturing, and unconventional energy sectors the big draws. In New York, real estate developer Zhang Xin’s Soho China Ltd. shared, with a Middle Eastern developer, the purchase of a forty-percent stake in the General Motors Building, a Manhattan landmark, each paying $1.4 billion. In the high-tech sector, IBM’s sale of its low-end server business, x86, to the Chinese PC maker Lenovo Group Ltd. for $2.3 billion has grabbed headlines. Yuhuang Chemical Inc. is set to begin construction of a methanol manufacturing complex in St. James Parish, on the Mississippi River in Louisiana, and, in the biggest greenfield project by a Chinese company in the United States to date, the Shandong Tranlin Paper Co. is investing $2 billion in setting up a manufacturing operation in a suburb of Richmond, Virginia. According to market analysts at the Rhodium Group, which tracks Chinese investment in the US, there are more than $10 billion worth of deals currently pending.

 

With its huge pile of foreign currency reserves and need for resources, an increase in overseas investments was a natural next step in China’s economic development. The push was both government-mandated and driven by changing commercial realities at home that forced Chinese companies to function in an increasingly high-priced and regulated domestic environment. Beijing created sovereign wealth funds, and in 1996 introduced what it called a “going out” strategy, urging firms to go after overseas investments. Chinese firms responded like racehorses out of a starting gate, with the United States as the number one finishing post.

Originally, “going out” was all about securing natural resources to continue China’s growth. But the acquisition of Smithfield reflects how Chinese investor interest has broadened in the past five years, looking beyond fossil fuels or metal ores. Wan Long, Shuanghui’s combative chairman, said his motives for acquiring Smithfield were “to assemble the most advanced technology, unmatched resources, and outstanding talents in the pork industry.” It is no mystery what Shuanghui expects out of the deal: Western expertise to give them a competitive edge, both at home and internationally, a springboard to foreign markets, including the US market, and strong brand identity.

In comparative terms, Chinese investment in the US to date is still small. China doesn’t even make the top fifteen countries on the US Department of Commerce list of foreign direct investors for 2012 (the most recent figures available). The Chinese investment total for that year was $10.45 billion, well below the United Kingdom, with $564.7 billion, and Japan, a distant second, with $309.3 billion.

Inevitably, opposition to China’s plunge into the US has revived memories of Japan’s investment frenzy in the United States in the late 1980s, when Japanese conglomerates, using their excess export dollars, snapped up American companies, property, and movie studios—causing a fearful and openly xenophobic opposition. There was also the fact that the Japanese kept their own market closed to US investments and limited American exports in key industrial sectors. By 1989, Japanese corporate mergers and acquisitions reached $20 billion. At the time, Mitsubishi’s acquisition of Rockefeller Center, Sony’s takeover of Columbia Pictures, and Matsushita’s purchase of MCI Universal Studios were highlights of Japan’s investment offensive. Amid an orgy of “Japanese bashing” in the media, White House economic adviser Lawrence Summers warned that Japan was “a greater threat to the US than the Soviet Union.”

But the massive Japanese spending spree was based on unrealistic projections of growth and returns, and even as US opposition calmed and many of Japan’s transplanted manufacturers gained a measure of acceptance, with Japanese employment of Americans growing to six hundred thousand, the Japanese stock market crashed in 1987 and the financial bubble burst at home, causing nearly two decades of economic stagnation and a turnabout in America. The bankruptcy of Rockefeller Center, whose purchase by Japan was once seen as a symbol of financial conquest, became in turn a symbol of financial defeat.

Japan Inc’s adventure in America is a cautionary tale for the Chinese. But it is unlikely that this piece of economic history will be repeated.

 

Beijing does place limits on foreign investment, but trade with China is very much a two-way street, with a lot at stake for both countries. China is America’s third-largest export market, and US investments in China are worth $51.4 billion. From 2010 to 2013, General Motors sold more vehicles in China than it did in the home market. China’s cumulative investment in the US is $36.5 billion and growing, and the Obama administration is happy “to welcome, encourage, and see nothing but positive benefit from direct investment in the United States from Chinese businesses and Chinese entities,” as Vice President Joe Biden said recently. And while Chinese intentions continue to be questioned by policymakers and politicians, Chinese investment is seen as a godsend by states and cities with high unemployment and strained budgets.

Congressional concern has focused on the Committee on Foreign Investment in the United States (CFIUS), the shadowy interagency body set up in 1975 that acts as gatekeeper for incoming foreign investment. Since it was established by President Gerald Ford, CFIUS has been re-shaped a number of times, but its essential role of screening potential foreign investment inflows for any significant danger to US interests and national security remains the same.

In its present form, the committee is chaired by the secretary of the Treasury and includes as members the secretaries of State, Homeland Security, Defense, Commerce, and Energy, the attorney general, the US trade representative, the director of the Office of Science and Technology Policy, the director of National Intelligence, and the director of the National Security Council. The Foreign Investment and National Security Act (FINSA) of 2007 brought CFIUS under closer congressional control. The bipartisan legislation made it mandatory for the agency to conduct an investigation of all proposed investments involving firms owned by a foreign government. CFIUS must also report to the Senate Banking Committee and the House Financial Services Committee on the result of all its investigations, file an annual report, and advise senators and representatives of foreign investment in businesses in their respective districts.

Subsequent proposals from lawmakers at a 2014 hearing of the US-China Economic and Security Review Commission included a new “net economic benefit test” to determine what’s in a given deal for the United States, and including scrutiny where appropriate of greenfield investments, which so far are exempt from the CFIUS. (Neither proposal has as yet been incorporated into the CFIUS screening process.)

“The CFIUS process is entirely confidential before, during, and after,” says attorney John Bellinger III of the Washington law firm of Arnold & Porter, who has been dealing with the committee both inside and outside the government for almost twenty years. Still, more and more Chinese businesses are seeking Congress’s reaction before the CFIUS process. “It’s a delicate balance because on the one hand you don’t want to raise the level of [congressional] awareness, on the other hand you don’t want members of Congress to read about a transaction in the papers and immediately have a negative reaction. You have to ask, how much defensive briefing should I do with Congress?”

For example, in August, when Huawei’s bid to buy 3Leaf Systems (an insolvent technology firm) drew protests from the Hill before the CFIUS screening process, on the grounds that the deal would put advanced American computer technology in Chinese hands, the company withdrew its application.

But what is “sensitive” in potential Chinese purchases of American enterprises? The FINSA legislation redefined “national security” to include infrastructure, and after further additions post-9/11, seventeen sectors of the economy now fall within the definition of critical infrastructure/key resources. But the net can be cast even wider. In September 2012, when President Obama cited national security interests in ordering the Chinese-owned Ralls Corporation to divest its interest in Oregon wind farms (one of the company sites was too close to a US Navy air base where drones were tested), it was the first time in more than two decades that a US president had exercised the authority given him in the screening process to block a deal acting on the recommendation of the interagency committee. In the same vein, CFIUS has rejected three successive bids by different Chinese mining companies to invest in mining operations in Nevada because in every instance the mine was judged to be too close to Fallon Naval Air Station in Nevada’s Lahontan Valley.

As the scope of Chinese investments becomes broader, new questions arise. The Smithfield Foods acquisition brought a torrent of protest from the Hill. During the CFIUS review process, fifteen members of the Senate Committee on Agriculture, Nutrition, and Forestry protested that the US food supply was “critical infrastructure” with national security implications, and should not be sold to a foreign power. Then, at the committee hearing when the sale went through, the chair, Michigan Democrat Debbie Stabenow, summed up the prevailing sentiment: “We need to evaluate how foreign purchases of our food supply will affect our economy broadly, and frankly, whether there is a level playing field when it comes to these kinds of business purchases. Could this sale happen if it were the other way around? Could Smithfield purchase Shuanghui? Based on what we’ve heard from many experts already, it sounds like the answer is no.”

 

In fact, there has been little reciprocity in the way China treats American business organizations. Despite making enormous progress in the past decade, says Shaun Donnelly, vice president for investment at the US Council for International Business, an influential business advocacy group, “China has not yet established an open, market-based investment regime. Far from it: screenings, controls, restrictions, informal pressures, and political interventions remain central to the Chinese investment system.” Major areas of concern expressed by US policymakers and businessmen include China’s extensive use of financial subsidies for state-owned enterprises; trade and investment barriers, including business sectors closed to foreign investors; pressure on foreign firms in China to transfer technology as the price for market access, in order to give Chinese firms a competitive edge; a relatively poor record of respecting intellectual property rights and keeping its currency undervalued; poor marks in respecting and implementing World Trade Organization obligations; and, of course, a record of hacking US government offices and businesses.

What both Washington and Beijing say they want is a bilateral investment treaty, which Obama and Chinese President Xi Jinping put on the fast track at their California summit in 2013. In July, the two sides committed to reach agreement on the core text by the end of 2014. The American side wants to see China open off-limits sectors in the Chinese economy to foreign investors through a significant reduction of the so-called “negative list,” which currently covers one hundred and thirty-nine separate areas, including finance and real estate. The Chinese complain that, while America claims to be open to outside investment, its own negative list has been growing.

In reality, the US position is deeply ambivalent. While federal officials worry about the impact of Chinese investments, state and local officials work hard to attract China’s business organizations. So the contest for China’s investment dollars is fought at state and city levels where what makes the difference are local infrastructure, industry clusters, state and local tax holidays, access to thriving markets, proximity to universities and research laboratories, human resource pools, local union attitudes, and labor laws.

At least thirty US states have established offices in the People’s Republic of China to promote trade and investment. The governors of California, Virginia, and Illinois among others have journeyed to China at the head of trade delegations to sell their respective states, and Chinese businessmen often receive VIP treatment when they visit America. California’s capital, Sacramento, where the highest number by far of Chinese firms is concentrated (two hundred and thirty-six at the most recent count), has established its own presence to drum up investments and increase trade generally in both Shanghai and China’s most populous city, Chongqing, which, says Antonio Yung, who runs this office for Sacramento, “is an up and coming area where we can operate with less competition [than they would face in Shanghai].” One challenge these trade offices face is to dispel what Bellinger calls “skittishness” among Chinese businessmen about investment in the US “because of their awareness of high profile rejections. Certain areas—cyber areas, technological areas, areas where they are in physical proximity to US defense locations—are going to get a lot of scrutiny and get turn downs, but ninety percent of acquisitions are going to go through.” Unlike the inflamed situation that accompanied the Japanese “invasion” of three decades ago, there are no reports of tensions in China’s workplaces in America or prolonged labor disputes. Although the workforce in Chinese-owned establishments is around seventy thousand, Beijing’s capital inflow may have saved jobs, since some of the acquisitions involved companies with poor financial balance sheets. A123 Systems was bankrupt. In 2010, Pacific Century Motors of China bought Nexteer, a Michigan auto parts maker, saving thousands of jobs in Saginaw, Michigan. “This city went from being an exhibit of America’s industrial decline to a case study of the impact of Chinese investment money on a US community,” the Wall Street Journal wrote.

Some economists claim that in return for creating jobs in the US, the Chinese will learn the benefits of working in an environment of rules and justice. In August, Chinese investing companies in America had a demonstration of how businesses are protected under the rule of law when the Court of Appeals in Washington halted a presidential order to the Ralls Corporation to divest itself of its Oregon wind farms on the grounds that the Chinese company’s constitutional rights had not been respected. The court ruled that Ralls had a right to due process, which in this instance meant access to unclassified information that had led to the agency’s decision, plus the right to rebut the evidence. The court had also left open the question whether CFIUS had exceeded its authority. Ironically, none of the Chinese media that hailed the court decision considered whether such a decision would be possible in their own country.

Roland Flamini is a freelance journalist and former foreign correspondent and bureau chief for Time magazine in the Middle East, Europe, and elsewhere.

OG Image: