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Is America’s Door Really Open to China’s Investment?

A ChinaFile Conversation

Daniel Rosen:

There have not been many new topics in U.S.-China economic relations over the past decade: the trade balance, offshoring of jobs, Chinese holding of U.S. government debt, whether China’s currency is undervalued and intellectual property protection problems have been the perennials.  So the recent advent of significant amounts of Chinese direct investment deals being done in the U.S. has generated a lot of attention. And it should: it is clear evidence both that economic conditions are changing in China, and that the sophistication of Chinese firms is evolving.

While each previous long-standing issue was associated with some losers in the U.S.—manufacturing workers, U.S. firms facing more competition, or vulnerability to our bond-holders—Chinese investment in real factories and businesses in the U.S. mostly brings benefits in terms of local employment, trade balance and tax rolls. The catch is that direct investment is perceived to carry potential national security risks too.  Chinese acquisitions of U.S. firms could put sensitive technologies in their hands, deprive us of reliable suppliers, or present espionage or sabotage risks – at least in theory.  That’s why we have a defined process managed by the Committee on Foreign Investment in the U.S.—CFIUS—to screen for such risks.

At this early stage of China’s global arrival as investor, CFIUS has blocked a tiny number of Chinese overtures, and required preconditions to approval of others.  A few high profile deals have also been scuttled by Congressional or other political objections before they could even go to CFIUS, for example CNOOC’s attempted takeover of Unocal in 2005.  That has left an impression in China and elsewhere that the U.S. is not as open to Chinese direct investment as it says.  While understandable, that’s unfortunate, because the truth is that the vast majority of Chinese deals have gone through, and that CFIUS has found ways to work with companies to mitigate existing risks. At the Rhodium Group, our China Investment Monitor database currently tracks 620 deals done since 2000—and the annual figures are at an all-time high, not on the wane.

All major nations employ a screening process for direct investment from abroad, including China.  The CFIUS process is not perfect and can certainly be improved, but a mechanism to address national security concerns is necessary to defend openness. The U.S. has managed to keep the door open through many past episodes of foreign-scare—for instance with 1980’s Japan—and we can assert that the U.S. has as open a door as any major nation, including for Chinese firms to come through.

 

Comments

When the Asia Society’s Center on U.S.-China Relations and the Woodrow Wilson Center’s Kissinger Institute released our report in May 2011, An American Open Door: Maximizing the Benefits of Chinese Foreign Direct Investment, by economist Dan Rosen and Thilo Hanemann, we were surprised by three things. The first was that most Chinese had little idea that their country’s rates of investment had increased by well over 100% in the past year or so, albeit from a rather low baseline that put China on a par with countries such as Denmark and New Zealand.

The second, was that despite their impression, as Dan suggests in his post above, America still remained very open to Chinese investment. Third, many were quite stunned by our estimates that there was a potential for $1-2 trillion in investment to flow out of China over this current decade. (The point of our study was simply to alert Americans to a new reality: If the political atmosphere in the U.S. is not made more receptive to Chinese investors seeking to do M&As in sectors of the U.S. economy that have no national security consequences—from investors in China eagerly seeking both to globalize and move up the value chain—they could go some place else, and we would be the worse for it.

 Why would they do that?

 Our finding was that, while the U.S. remains one of the most open economies to foreign investment in the world—which has been to enormous benefit—all-too many Chinese do not see us that way. In other words, even though most investments run into very little official resistance, a number of prominent failures (some of which have had legitimate national security concerns) have created the undeniable impression that Chinese investment is not really welcome here.

Paradoxically, we also found that our actual regulatory regime—overseen by the inter-departmental Committee on Foreign investment in the U.S. (CIFIUS), which is run out of the Treasury Department and can only deny M&A investments that jeopardize national security (and has no say over “Greenfield” investments)—was actually quite fair, turning down only a very small percentage of Chinese investments, largely in the telecoms field. What we found to be creating the impression of non-receptivity, poisoning our investment climate and driving some Chinese investors away was, instead, an often fearful, even hostile, political atmosphere, often created by lobbyists and members of the U.S. Congress with protectionist interests, rather than the government’s regulatory process itself.

But it also must be said that the Chinese have also not played their political hand as well as they might either. Many state owned enterprises (SOEs) have very murky systems of management and governance that are lacking in transparency. Cyber hacking, intellectual property theft, and the increasingly truculent manner in which China now sometimes deports itself in the world also create an unfavorable climate in which “trust building” is hardly possible.

Nonetheless, if one believes that more FDI from China—and every other country, for that matter—is good generally good for the U.S., as Dan and I, do, then Americans need to become far more mindful of the consequences of the effect of unofficial political static, that can serve as a negative force field, especially when a high profile Chinese enterprise seeks to make a beachhead in our economy. In reflecting on this situation, here it is wise to remember that in the 1980s, we once had the same negatively reflexive reaction to the prospect of greater Japanese investment. (Remember the purchases of Pebble Beach and Rockefeller Center?) Now, Japanese companies provide almost three quarters of a million jobs here in the U.S.

Of course, China is not Japan. But, as our report demonstratively shows, there is an enormous wave of potential FDI building that wants to exit China. It will only grow over the coming decade, and despite the vagaries of our overall bilateral relationship with China, it is emphatically in our national interest not only to accept our share, but to actively cultivate it.

I grew up in Los Angeles in the Reagan era U.S. of A., when the Made in America label was prevalent—even as more and more Americans drove Datsuns, Toyotas and Subarus, learned to love take-out sushi and live with Pebble Beach, Rockefeller Center and Columbia Pictures being owned by investors headquartered in Tokyo.  I was lucky to have parents who’d traveled to and even worked in Japan. I visited the country for first time right after high school and studied the language at a U.S. college where many of my peers were of Asian descent. Still, the “Buy American” meme persisted and spun the sort of static that, as Orville points out above, is again rearing its head, this time in relation to many things Chinese. Well, the U.S.—indeed, even I—survived those waves of 1980s Japanese investment and we all learned that it takes all kinds of currency to make an economy as large and dynamic as ours go ’round.

Question: How many moviegoers in America today—people who last year spent over $10 billion on tickets to see mostly homegrown Hollywood films made in English—care a single kernel of popcorn that a great number of the suburban multiplexes where they watched “Lincoln,” “Argo,” and “Life of Pi” are owned by a Chinese developer that some say overpaid with the $2.6 billion it plunked down to make it the largest theater chain on Earth?

Right. I thought so. As long as AMC’s still playing good movies at competitive prices, why should we care or even notice in which country its big boss sits?  After all, even AMC—now nominally controlled by the biggest business leader you’ve never heard of, Mr. Wang Jianlin, CEO of the Dalian Wanda Group—knows there’s a limit to the seemingly insatiable American appetite to buy Chinese. In February, AMC continued its experiment of bringing to America not cheap plastics or textiles but subtitled Chinese films. As The Los Angeles Times reported upon the U.S. release of the comedy “Lost in Thailand” (China’s biggest Mandarin-language box office hit of all time), AMC has released 25 Chinese films since 2010, but none has managed to do major business in America. The most successful was "If You Are the One II," a romance between a millionaire and a flight attendant, which collected a mere $426,894 from 21 theaters. “Lost in Thailand” disappeared from U.S. screens as fast as you can say “Ang Lee’s a Chinese-American.”

Today was Heritage Day at my daughter’s Brooklyn elementary school.  Just after the bell, each child shared a bit about his family’s background and then named the country about which he most hoped to learn more.  There wasn’t a single Chinese kid present, but China was the destination of choice for more of these eight- and nine-year-olds than any other country. “I want to go to China because information about it is hard to get,” said one girl, not my daughter, who was raised in Beijing. Still, my bet is that few of the kids in the class begged their parents to see “Lost in Thailand.”

So, yes, while America’s door is open to Chinese investment (evidence Wanda), many Americans will continue to resist it (evidence "Lost in Thailand") until their kids demand it—demand Chinese Tamagotchis to care for and a PSY from Shanghai to dance to. In the arena of soft power, movies are the best selling tools America’s ever had, for selling everything to chicken from Kentucky to cars from Detroit.