NOTE

Chinese FDI in the United States: Q1 2011 Update

by Thilo Hanemann | June 8, 2011

Chinese investments in the first quarter of 2011 foreshadow another big year for China’s FDI in the United States. During the first three months of the year, Chinese firms spent an estimated $758 million for 6 greenfield projects and 5 acquisitions in America.

The largest transaction was CNOOC’s $570 million tie-up with Chesapeake to develop shale gas fields in Colorado and Wyoming, the firm’s second big investment in American shale gas assets in 6 months. Other sectors receiving capital from China include industrial machinery, electronic components, plastics, consumer products, IT services, renewable energy and real estate.

The political climate for Chinese investment in the U.S. remains difficult. While some large transactions in gas and power generation have passed national security screenings without significant public attention, recent acquisitions in the IT and aviation sectors have caused heated debates in policymaking circles and the public. Concerns about China’s openness to foreign investment and a controversial new Chinese framework for national security screening of inward FDI have added to the debate.

Strong Q2 Ahead: Several already completed transactions such as Huaneng’s $1.2 billion stake in Massachusetts-based utility Intergen indicate that the second quarter number for Chinese investment in the US will also come in strong. The total value of investments in the first half of this year should easily surpass 2 billion, with some upside potential.

Trends and Patterns

During the first quarter of the year we recorded 11 new Chinese investments worth a total of $758 million. 6 of these investments are Greenfield projects with a total value of $153 million, the other 5 transactions are acquisitions together worth $605 million (see Figure 1). Both the number of deals and the total value of investments dropped somewhat compared to the very strong fourth quarter of last year. The value of greenfield investments was higher than in the last quarter but there was only one acquisition valued higher than $500 million.

California and Texas lead the table of favorite investment locations in Q1 with 3 and 2 deals respectively. Other states that received investment from China were Colorado, Illinois, North Carolina, Georgia and Indiana. The biggest ticket sectors this quarter were fossil fuels and metals processing with investments of $570 million and $100 million respectively. Other sectors that saw inflow of Chinese capital include industrial machinery, electronic components, plastics, consumer products, IT services, renewable energy and real estate.

Please visit RHG’s China Investment Monitor website to explore the patterns of Chinese investment by state, industry and ownership in the first quarter 2011 and previous periods.

Key Transactions

The biggest transaction in the first quarter was China National Offshore Oil Corporation’s 33.3% stake in Chesapeake’s 800,000 oil and natural gas leasehold acres in the Denver-Julesburg and Powder River Basins in northeast Colorado and southeast Wyoming. CNOOC paid $570 million in cash for its interest and committed to fund additional drilling and completion costs up to $697 million at a later stage of development. This is CNOOC’s second big shale gas investment in the United States following a $1.08 billion investment in Chesapeake’s shale gas assets in southern Texas in the fourth quarter of 2010. The minority positions in Chesapeake’s shale gas fields give CNOOC an opportunity to invest in upstream assets in a low-risk environment. Moreover, the cooperation with Chesapeake also allows the firm to gain experience and know-how for the development of shale gas projects at home. According to the EIA, China has massive reserves of shale gas and drilling is still in a very early stage. China’s National Development and Reform Commission (NDRC) is currently preparing a national shale gas development plan.

While CNOOC is moving into the U.S. upstream energy sector, Chinese solar manufacturers continue to invest in America to expand their capacity in the downstream renewable energy segment. In March China-based LDK Solar completed a $33 million investment in Solar Power, a California-based developer and provider of solar installations. Intense competition and deteriorating margins in the manufacturing segment have recently hurt the profits of solar producers. Acquisitions in promising overseas markets offer China’s solar industry the opportunity to move up and down the value chain to escape the margin squeeze in the manufacturing segment.

The biggest manufacturing greenfield project in the first quarter was Shandong Nanshan Aluminum’s $100 million investment in a 435,000-square-foot aluminum extrusion manufacturing facility in Lafayette, Indiana. Nanshan says that its first American manufacturing facility will create at least 150 new jobs and produce high-end aluminum extrusions used in automotive, railway, distribution, industrial and electrical industries. Construction has already started and production is slated to begin in 2012.

In the chemicals industry, raw material producer Bluestar Silicones announced a new $20 million manufacturing and R&D facility in Charlotte, North Carolina. Its parent firm China Bluestar Group is a subsidiary of government-controlled China National Chemical Corporation (ChemChina), in which US-based private equity group Blackstone has a 20% minority stake. China Bluestar has been expanding its international presence aggressively since 2006 with the acquisition of the global silicones business of French specialty chemicals producer Rhodia (2007) and the $2 billion purchase of the silicon businesses of Norwegian Orkla ASA’s Elkem unit (2010).

Chinese firms also continued to invest in R&D, administration, marketing and other manufacturing-related service activities in the United States. China WLCSP, a provider of wafer level miniaturization technologies and processes for the electronics industry is building a new R&D center Sunnyvale, California. Heat exchange company Zhejiang Yinlun Machinery bought a 50,000-square-foot-facility in Morton, Illinois, to build its North American headquarters. The firm says it aims at creating 100 jobs in the first 2-3 years, mostly in research and development and other service activities.

Amid increasing activity in U.S. capital markets, Chinese IT companies also continued to tap into technology, experience and talents through acquisitions in North America. The latest example is Tencent’s majority stake in California-based Riot Games, a developer of premium online games. Tencent is one of world’s largest internet firms and provides online services such as messaging, e-commerce and gaming. Riot said that the partnership with Tencent will allow the company to hire new staff for its Los Angeles offices and expand aggressively into new games and markets.

Finally, Chinese investors sealed another interesting U.S. real estate deal in the first quarter. Chinese property developer Dashing Pacific Group spent $2.15 million to acquire a city-owned restaurant complex in the Marinara Docks in Toledo, Ohio. Originally the Chinese investor was proposing to build a new residential, office, retail and entertainment district in the city’s Marinara district for an estimated $200-300 million, which would make it one of the largest Chinese real estate investments in the United States. The second stage of the project was temporarily put on hold in recent months but it seems to be back on the table now. 

Policy Developments

The political environment for Chinese investors in the United States remains difficult. During the first quarter, the domestic debate in the U.S. has mostly focused on Chinese investments in telecommunication infrastructure and the purchase of high technology assets.

Transactions in sectors that are traditionally considered as politically sensitive (CNOOC’s investments in gas assets or China Investment Corporation’s stake in AES in the previous quarter) have gone through without major public controversies, but investments in high tech assets have come under increased scrutiny. Telecommunications equipment maker Huawei ran into trouble with the purchase of assets from bankrupt IT startup 3Leaf. The Committee on Foreign Investment in the United States (CFIUS) forced Huawei to submit the deal for review and decided to issue a negative recommendation. Huawei first announced to oppose the CFIUS decision but eventually dropped the $2 million deal to avoid a showdown with the Obama administration.

Another deal that has caused public debates is China Aviation General Industry Aircraft’s (CAIGA) purchase of the Minnesota-based private-aircraft maker Cirrus Industries. In a letter to Treasury Secretary Geithner, a congressman from Minnesota had warned about national security risks and the loss of local jobs if the deal was approved. Aviation experts and the management of Cirrus have dismissed such concerns as not warranted. CFIUS is currently reviewing the transaction.

The example of Dashing Pacific Group’s investment plans in Ohio illustrates that Chinese investors can also get tangled up in local politics. Efforts by Toledo’s mayor to attract Chinese money into a new riverside property development have been met with skepticism by local policymakers on concerns about transparency of the new owner’s development plans and the use on non-unionized labor.

Recent comments from high-level Chinese policymakers during the Strategic and Economic Dialogue in April and elsewhere indicate that the topic of cross-border investment openness is gaining importance on China’s economic policy agenda toward the United States. Officials on the U.S. side continue to emphasize that Chinese investment is welcome and treated fairly, but calls by policymakers and businesses for greater reciprocity and openness on the Chinese side have increased. Chinese plans for a national security screening regime akin to the CFIUS in the United States have caused irritations, as the interim rules define national security very broadly and might open the door to politicization of deals.

Outlook

Several transactions completed in April and May indicate that the number for Chinese investment in the US in the second quarter will come in strong as well. Examples are a 50% stake of China’s Huaneng Group in Massachusetts-based utility Intergen valued at more than $1.2 billion or the $186 million acquisition of Teledyne’s aviation piston engine business by Technify Motor, a subsidiary of state-owned Aviation Industry Corporation of China (AVIC). The total investment value in the first half of this year should easily surpass 2 billion, with some upside potential depending on deals in coming weeks.