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Chinese FDI in the United States: Q2 2011 Update

This update reviews Chinese direct investments in the U.S. in Q2 2011, highlights key transactions and comments on the most important policy developments.

In Q2 2011 Chinese firms spent 2.06 billion on 13 greenfield projects and 5 acquisitions in the United States, making it the second largest quarter on record in value terms. The strong second quarter boosted total Chinese FDI expenses in the U.S. in the first six months of 2011 to $3.27 billion, split between $573 million for 20 greenfield projects and $2.7 billion for 11 acquisitions.

Chinese investors continue to target a wide range of industries: In Q2, we recorded deals in power generation, aviation, information technology, consumer electronics, telecommunications, transportation, chemicals and pharmaceuticals. The largest transactions were a $1.23 billion takeover in power generation and two acquisitions in aviation valued at $200 million each.

Politically the second quarter has been relatively calm: The Obama administration ramped up efforts to promote foreign investment and CFIUS cleared two deals in the aviation industry. On the Chinese side, neither the new national security screening framework nor several antitrust decisions produced controversial outcomes. However, the recent cases of fraud by U.S.-listed Chinese small-caps might hurt the prospects of Chinese investors in the U.S. in the longer term.

Slower Q3 Ahead: We expect the Q3 figure for Chinese FDI in the United States to be lower due to slower summer months. The structural interest of Chinese investors in the U.S. economy remains strong despite recent signs of a slowdown, so we consider the full year number on track to match or surpass the record 2010 figure of $5.3 billion.

Trends and Patterns

In Q2 2011, companies from China spent $2.06 billion for 18 investments in the United States. Chinese buyers closed five acquisitions together worth $1.69 billion, among them one deal valued at more than $1 billion and 2 deals valued at approximately $200 million. The number of greenfield investments hit a quarterly record high of 13 new projects, but the combined value of these deals ($368 million) is significantly lower than the sum spent on acquisitions (for details see Figure 1).

At more than $2 billion, FDI expenditures by Chinese firms reached the third largest quarterly level ever in Q2 2011. The last three quarters all saw investment of more than $1 billion, underlining the strong structural growth of Chinese investment interests in America. The combined figure for H1-2011 amounts to $3.27 billion. This figure runs counter the official data by China’s Ministry of Commerce (MOFCOM), which suggest a mild slowdown of FDI flows into the United States in H1-2011. The conflicting figures can be explained by different methodologies and problems of Chinese authorities with capturing outflows accurately and timely.

The geographic distribution of Chinese investments in Q2 follows similar patterns as in previous quarters: investments are spread widely across the United States, but several locations are emerging as favorite targets of Chinese investors. For Q2 we recorded Chinese investments in as many as 16 different states. California attracted the highest number of investments (3), followed by New York (2). Other states that received investments include North Carolina, Delaware, Georgia, Nevada, Wisconsin, Minnesota, Maryland, Texas, Idaho, Tennessee, Massachusetts, New Jersey and Florida.

Chinese investors also continue to target a wide range of industries. For Q2 we recorded deals in utilities, aviation, information technology, consumer electronics, telecommunications, chemicals and pharmaceuticals. The largest transaction in Q2 2011 was China Huaneng’s $1.23 billion stake in InterGen, a global power plant operator headquartered in the United States, followed by two $200 million takeovers in the aviation industry. The greenfield scene was dominated by investments in telecommunications and electronics. We highlight the key transactions and the underlying drivers and growth stories in the next section.

Please visit our China Investment Monitor website to explore the patterns of Chinese investment by state, industry and ownership in Q2 2011 and previous periods.

Key Transactions

The biggest deal closed in the second quarter was China Huaneng’s 50% stake in InterGen, a global power generation firm headquartered in Burlington, Massachusetts. InterGen operates twelve power plants in the UK, the Netherlands, Mexico, the Philippines and Australia representing a total generation capacity of more than 8,000 MW. The previous owner of the $1.2 billion stake in InterGen was GMR Group, an Indian multinational headquartered in Bangalore. Huaneng now co-owns the company with the Ontario Teachers’ Pension Plan. Huaneng’s acquisition is the second major Chinese investment in a U.S.-based global electricity company, following the $1.6 billion stake of China Investment Corporation (CIC) in AES in Q1 2010.

China’s state-owned enterprises (SOEs) in electricity generation and distribution have recently all accelerated their overseas expansion with a series of investments in the U.S., Europe and Latin America. While these investments arouse suspicion in many countries, they are not fueled by political strategy but rather a commercial incentive structure that encourages overseas investment. China’s power generation market has an oligopolistic structure and is divided between a small number of SOEs. This market structure gives incumbents a steady stream of revenue and good access to low-interest loans, but it limits firms’ domestic expansion opportunities. Moreover, the government controls retail electricity prices, which reduces firms’ profit margins and thus dis-incentivizes domestic investment. Tougher policies against SOEs’ diversification into other profitable sectors (most importantly real estate) aggravate the situation and limit firms’ domestic growth prospects. Against this backdrop, it makes a lot of sense for firms to put their cash into global power generation assets with reasonable and stable returns.

Two high-profile acquisitions in Q2 highlight the interest of Chinese firms in advanced general aviation assets: in April, Technify Motor, a U.S.-based subsidiary of Aviation Industry Corporation of China (AVIC), closed the acquisition of Teledyne Continental Motors, a developer of aircraft engines, parts and batteries. In June, China Aviation Industry General Aircraft (CAIGA) finalized a merger with Cirrus Aircraft, a leading manufacturer of general aviation planes. The two deals are the latest examples of China’s shopping tour for general aviation assets in North America and Europe that began two years ago. In 2009, a subsidiary of AVIC acquired Austria-based Future Advanced Composite Components (FACC), a specialized manufacturer of composite materials and parts for the aviation industry. A year later, in April 2010, AVIC joined a group of bidders to buy the assets of bankrupt Epic Aircraft, a provider of kits for single-engine turboprops based in Oregon.

The sudden spike in Chinese aviation M&A was triggered by the political decision to liberalize China’s air space and the desire of domestic firms to profit from the expected boom in the general aviation industry. In November 2010 China’s cabinet and the Central Military Commission jointly released an order to gradually open the country’s low altitude airspace to non-military air traffic. In combination with an announced build-out of the infrastructure, this move is expected to set off a surge in demand for general aviation aircraft, which is shaping up to one of the hottest China growth stories of coming years. However, China’s domestic players are not well equipped to join the party because they significantly lag behind in technology and experience. As the time horizon is relatively short, overseas acquisitions will play a key role for Chinese aviation players in catching up. More acquisitions that allow Chinese firms to gain a stronger foothold in global general aviation value chains are likely. As largest general aviation market of the world with the most advanced technology, the United States is an attractive target for buyers.

The second quarter also saw a slew of new investments by Chinese telecommunications firms and providers of the communications equipment. China Unicom alone opened three new projects: a data center in Los Angeles, a regional sales and support office in New Jersey, and a new Point of Presence (PoP) in Miami. In its tenth year in the United States, IT equipment maker Huawei continues to add staff and expand its capacities in the United States, despite numerous political setbacks in conquering the U.S. market. In April, Huawei celebrated the opening of its new North American R&D headquarters in Santa Clara, California. Shorty thereafter, it opened another R&D facility in Bridgewater, New Jersey, where the firm’s East Coast offices are located. Huawei says it now employs more than 1,500 people in the U.S.

Finally, two new investments in Q2 showcase the increased interest of Chinese consumer electronics firms to follow the example of Haier and establish presence in developed markets to strengthen sales, support, branding and R&D. In June, air conditioner maker Gree held the ribbon cutting ceremony for its new manufacturing and logistics facility in Los Angeles. Gree originally started out as OEM manufacturer for Western brands such as GE, Whirlpool or Electrolux. The next step in moving up the value chain was establishing a strong brand in China and other Asian markets. Now the firm is ready to enter the North American market with its own brand, boosted by a merger with Soleus, a U.S. manufacturer of high quality and energy efficient consumer appliances. Another leading Chinese producer of consumer electronics, Hisense, announced in Q2 that it will expand its R&D, logistics and after-sales operations in Georgia. A stronger Chinese Yuan and structurally rising costs for labor and other input factors will further increase the pressure on Chinese manufacturers without strong brands to move into higher margin segments – in many cases this will mean investments in developed markets to serve customers locally.

Policy Developments

The second quarter started with a slew of initiatives by the federal government to promote foreign direct investment in the United States. First, President Obama reaffirmed America’s commitment to an open investment policy, under which all investors are treated in a fair and equitable manner. Shortly thereafter, the President issued an Executive Order that established SelectUSA, a new institution under the Commerce Department to bundle federal investment promotion efforts across different government agencies. These new measures bring the U.S. closer to standards in other OECD countries, but the steps are rather symbolic and greater efforts are needed to make the federal investment promotion framework more competitive.

With regard to national security debates, the second quarter was relatively calm. CFIUS did not raise opposition against two takeovers in the aviation industry, and earlier opponents on the Congressional side held back with further attacks. While things were calm in Washington, rumors of a Chinese investment created another ugly backlash on the local level: in Idaho right-wing activists condemned early-stage plans by a Chinese investor to establish a technology zone south of the Boise Airport as “communist takeover of Idaho” and launched furious attacks against supportive local policymakers in media and blogs. Ironically, Idaho has been very successful recently in attracting Chinese investors and related jobs: solar firm Hoku is currently finishing the work on a $260 million polysilicon plant in Pocatello, which is expected to create 500 jobs in the long term, and Chinese bus maker Zhongda recently chose Boise as location for its new U.S. headquarters.

In April, ICBC finally submitted its application to acquire Bank of East Asia’s U.S. unit to the Federal Reserve, whose Board of Governors is reviewing the application now. ICBC’s acquisition would be the first controlling stake of a Chinese bank in the U.S., which means that the Foreign Bank Supervision Enhancement Act (FBSEA) requires the Federal Reserve Board to find that the foreign bank is subject to comprehensive supervision on a consolidated basis by its home country supervisor. A positive decision in this case would open the door for more Chinese acquisitions in the U.S. banking sector.

On the Chinese side, there were no major political moves that negatively impacted the sentiment for cross-border FDI between both countries. The provisional rules on national security screening of foreign investment announced in March 2011 have not been applied to a single case until now. The final rules and detailed regulations are scheduled to be released in August. A series of investigations into cross-border acquisitions under China’s Anti-Monopoly Law did not result in controversial outcomes. Transactions reviewed by China’s Ministry of Commerce (MOFCOM) include Caterpillar’s acquisition of U.S.-based mining machinery firm Bucyrus, Joy Global’s takeover of China-based International Mining Machinery, or Meyer Burger’s purchase of German solar equipment maker Roth & Rau. The next test of Chinese antitrust regulators will be Nestle’s $1.7 billion takeover of Chinese candy maker Hsu Fu Chi.

Finally, from a longer term perspective, the recent cases of fraud by U.S.-listed Chinese firms may have an impact on the politics of Chinese investment in the US. While none of the fraud cases were directly related to direct investments, they undoubtedly damaged the (already not very positive) perception of “China Inc.” in the American public. This negative momentum might provide a fertile ground for hostile attacks against Chinese investments by domestic interest groups. The perception of greater risk in dealing with China-based companies might also increase the stakes in American board rooms to endorse Chinese takeover bids, particularly if there are other non-Chinese suitors. Finally, the fraud cases have exposed the mismatch between Chinese firms’ ambitious global aspirations and a domestic legal and regulatory environment that leaves them unprepared for operating in sophisticated markets. As a result, OECD policymakers and regulators are going to demand greater efforts by their Chinese counterparts to provide the domestic frameworks and institutions necessary for their firms’ expansion in these markets. The first test will be the Public Company Accounting Oversight Board’s (PCAOB) demand to allow U.S. inspectors to scrutinize Chinese audit firms. Other areas include corporate governance, firms’ transparency, corruption control or corporate social responsibility.


The Q3 figure for Chinese FDI in the United States will likely be lower as the summer months of July and August have been relatively calm thus far. However such a drop should be seen as temporary phenomenon.  The gloomier outlook for the U.S. economy is unlikely to depress FDI flows as the North American market plays a central role in many Chinese firms’ internationalization strategy. A temporary slowdown of the U.S. economy will not change this fundamental importance. To the contrary, the recent drop in company valuations and a gradually appreciating Chinese currency could further increase the attractiveness of U.S. assets for Chinese buyers. We therefore still consider the full year number on track to surpass the record 2010 figure of $5.3 billion.