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Chinese FDI in the United States: Q3 2011 Update

In Q3 2011, Chinese investors expanded their foothold in the United States, spending $1.03 billion for 9 greenfield projects and 9 acquisitions.

Q3 2011, Chinese investors expanded their foothold in the United States, spending $1.03 billion for 9 greenfield projects and 9 acquisitions. In this note we summarize the third quarter trends, analyze key transactions, and discuss the latest policy developments in the U.S.-China investment relationship.

Q3 was a slow quarter: In Q3 2011, Chinese firms spent $1.03 billion on 9 greenfield projects and 9 acquisitions in the United States. This is a 50% drop from the $2 billion last quarter, but a 375% increase from Q3 2010. Total Chinese FDI expenses in the U.S. in the first nine months of 2011 add up to $4.2 billion.

Structural adjustment in China drives outward investment: Chinese investors continue to invest in a broad range of U.S. industries, but sectors hit by adjustment pressures in China, such as real estate and renewable energy, are seeing the most notable increase in interest by Chinese investors.

While deal flow was moderate, politics got heated: The U.S. government ramped up investment promotion efforts but at the same time called for better market access in China and announced new international initiatives to level the playing field between state-owned enterprises and private sector firms. China finalized rules for a new national security screening framework, which is irritating foreign investors.

Trends and Patterns

In Q3 2011, Chinese investors spent $1.03 billion on 9 greenfield projects and 9 acquisitions in the United States. This is a 47% drop from the almost $2 billion spent last quarter. However, it represents a 375% increase from Q3 2010 and is the highest third quarter on our record. Total Chinese FDI expenses in the U.S. in the first nine months of 2011 add up to $4.2 billion, on track to match or surpass last year’s $5.2 billion.

As in previous quarters, investments were spread across a broad range of industries and U.S. states. Sectors that are traditionally the focus of Chinese investors, such as IT services and bio sciences, continued to attract Chinese money. Nine different states recorded Chinese deals, with California (7 deals) and New York (3) as the frontrunners.

Two landmark deals — a large-scale acquisition in the property sector and a greenfield project in renewable energy — account for 75% of the total transaction volume in Q3. These two deals demonstrate that Chinese overseas investment is very much a mirror for what is happening in the Chinese economy: after years of boom, China’s real estate market suffers from tight credit controls and other policies limiting growth opportunities and increasing risks. Individuals, firms and institutional investors have started to invest in safe havens – commercial real estate in prime overseas locations. China’s renewable energy industry is facing serious overcapacity, shrinking profits and trade frictions. Going abroad via outward FDI allows firms to diversify risks, tap new markets and adjust their business models to cope with structural adjustment at home.

The key deals are analyzed in next section. Please visit RHG’s China Investment Monitor website to explore the patterns of Chinese investment by state, industry and ownership in Q3 2011 and previous periods.

Key Transactions

Chinese banks have been providing credit lines to U.S. developers for refinancing commercial real estate since 2010. Now, Chinese investors seem to be ready to step up and take equity stakes in commercial and residential U.S. property. In May, a Chinese investor saved an office tower on 1180 Sixth Avenue in New York from foreclosure with a $265 million equity and debt injection. In Q3 Chinese investors closed three major real estate deals: in July, Chinese real estate portal SouFun purchased AIG’s former training center at 72 Wall Street in New York for $46 million; in August, private equity firm SZ Prosperity Investment bought a retail property in Temecula, California, for $6 million; and in September, investors associated with property developer SOHO China spent $569 million for a 49% stake in Park Avenue Plaza, an office building in midtown Manhattan with tenants including McKinsey, BlackRock and Swiss Re.

Betting on long-term recovery of U.S. real estate is also one of the strategies of China’s sovereign wealth fund to diversify away from government securities. After talks to buy Harvard University’s U.S.-focused real estate portfolio for about $500 million failed, China Investment Corporation (CIC) acquired a 7.6% stake in General Growth Properties (GGP) in November 2010. GGP is one of the largest owners of shopping malls in the US and emerged from bankruptcy in 2010. In late 2010, CIC joined AREA Real Estate Finance Corporation to buy a preferred equity stake in 650 Madison Avenue, an office building in Manhattan.

In light of restrictive policies and uncertainty in housing markets at home, the appetites of wealthy Chinese individuals for U.S. residential property have grown similarly fast. According to the US National Association of Realtors, Chinese buyers now account for 9% of the $41 billion in international U.S. home sales, making China the second most important source of foreign investment in U.S. residential property (Figure 2). These investments should technically be counted as FDI, but they mostly fly below the radar due to their small size and all-cash nature. Looking forward, this trend is set to continue: earlier this year, leading Chinese real estate service provider SouFun announced plans to set up a strategic platform for Chinese homebuyers seeking property purchases in popular cities in the U.S., Europe and Australia.

The second industry that shaped the deal flow in Q3 is renewable energy. In Q3 alone, four Chinese solar PV manufacturers made new investments in the U.S.: Linuo Solar bought IBM’s former area to build a warehouse, which it plans to expand into a manufacturing facility; the San Francisco Bay Area welcomed a new R&D facility by Yingli Green Energy and the headquarters of China Sunergy; and Clenergy International opened a branch office in Palm Desert, California. As the solar industry is suffering from sluggish global demand, overcapacity and narrowing margins, Chinese solar firms are ramping up their presence in the US and other key overseas markets to be closer to the customer and to expand into higher margin segments of the global value chain. Overseas project developers and integrated solar firms with a strong downstream presence are attractive takeover targets for Chinese buyers. Additional pressure to localize production of solar panels and other renewable energy goods may result from increasing trade frictions between the U.S. and China in the solar space.

Another investment in the renewable energy sector is notable: in August, Chinese wind turbine manufacturer Goldwind broke ground on the 106.5MW Shady Oaks wind farm in Illinois, which it will develop in conjunction with its partner Mainstream Renewables. The firms won a competitive bid from the Illinois Power Agency last year and will supply electricity to Commonwealth Edison under a 20 year contract beginning in 2012. Total capital investment is estimated at around $150-200 million. The 71 turbines of Shady Oaks will be imported from China, but the project is estimated to have around 60% local content and create over 100 U.S. construction and permanent jobs. Shady Oaks is Goldwind’s second U.S. wind farm, its first being a 4MW pilot project in Pipestone, Minnesota, which was completed in 2010.

Policy Developments

On the U.S. side, the positive rhetoric toward foreign investment in general and Chinese FDI in particular continued. In September, the Council on Jobs and Competitiveness, a non-partisan group of business leaders who advise the President on strengthening U.S. competitiveness, proposed a National Investment Initiative (NII) to more aggressively promote foreign direct investment into the US. Its goal is to attract one trillion dollars of FDI by 2015, a 20-25% increase over recent trends. Government officials continue to actively encourage Chinese investment. On his trip to China in August, Vice President Biden emphasized that he sees “nothing but positive benefit from direct investment in the US from Chinese businesses”. America’s new ambassador to China, Gary Locke, said that helping Chinese firms in the US will be one of two top priorities for his term in Beijing. Other high level officials such as Under Secretary Robert Hormats, who accompanied a group of U.S. governors to China to market the U.S. marketplace, echoed this stance.               

At the same time, U.S. officials have become more vocal about restrictions for foreign businesses in China. Ambassador Locke stressed that fair access to the Chinese market for foreign investors was of increasing importance to Washington. These calls were echoed by European officials, who are contemplating kicking off negotiations on a EU-China bilateral investment treaty (BIT). While not playing the reciprocity card, EU Trade Commissioner De Gucht reminded China that it needs to show more willingness to level the playing field for foreign businesses at home to avoid protectionist reactions abroad.

There have been no controversial CFIUS decisions in Q3. However, the State Department has initiated a special review of China Aviation Industry General Aircraft’s (CAIGA) takeover of US aviation manufacturer Cirrus. Officials are investigating if the engine technology of one of Cirrus’ small jet prototypes falls under military technology because it uses a Full Authority Digital Engine Control (“FADEC”). A transfer of this technology to China may be deemed sensitive as CAIGA’s parent firm China Aviation Industry (AVIC) is working on a Chinese stealth fighter jet. In case of a negative outcome, Cirrus and its new Chinese owner could lose access to its prototype.

Internationally, the Obama administration is pressing ahead with new initiatives to address concerns that state-owned or state-supported enterprises could distort competition and pricing in global markets. As stated by Under Secretary Hormats earlier this year, the US sees “state capitalism” as “a new challenge to the global consensus on open markets and private investment”. U.S. efforts on the bilateral level include an adjustment of negotiating texts for bilateral investment treaties (BITs) and free trade agreements such as the Trans-Pacific Partnership (TPP) agreement. On the multilateral level, the U.S. will support ongoing efforts by international organizations such as the Organization for Economic Cooperation and Development (OECD) or the United Nations Conference on Trade and Development (UNCTAD) to develop new frameworks to ensure “competitive neutrality” between SOEs and the private sector. These efforts will further complicate the U.S.-China investment relationship in the future. It will lower the already slim chances of getting a U.S.-China BIT under way. And it could potentially fuel investment protectionism – some U.S. labor unions are already calling for new investment rules taking a more aggressive stance toward state-owned enterprises than the current U.S. investment review framework.

On the local level, the failure of Mamtek’s $65 million investment in an artificial sweetener plant in Moberly, Missouri, sparked debates on government subsidies for foreign investors. In the case of Mamtek, the city of Moberly had issued $39 million worth of special bonds to help the Chinese parent firm to finance its U.S. factory, in addition to the promise of $18 million of state aid and tax incentives. Mamtek missed the first bond payment in August and stalled the construction of the facility. Standard & Poors subsequently downgraded the city’s credit rating. Moberly’s experience will serve as warning for other municipalities to not issue financial incentives without proper due diligence. The public debate will impose more discipline on local governments, which have been aggressively courting Chinese investors in the past to attract investment and jobs.

On the Chinese side, officials, researchers and state media continued to voice concerns about U.S. openness to Chinese investment. In September, Minister of Commerce Chen complained that some countries exclude Chinese firms “on the excuse of national security”. While the Chinese government has been silent in the competitive neutrality debate, Chinese think tank researchers refuted the initiatives as an attempt by a declining power to retain its economic supremacy.

At the same time, China added a new layer of bureaucracy for foreign investment into China. In August, the Ministry of Commerce (MOFCOM) issued the final regulations of China’s new national security screening framework, replacing the temporary regulations enacted earlier this year. While the institutional setup of this framework is very similar to the Committee on Foreign Investment in the United States (CFIUS), there are two major differences that stand out. First, the scope of national security screening is intentionally kept very broad, including “national economic security” or “social stability” as reasons to block foreign investment. An internal document by MOFCOM listing more than 50 potentially sensitive industries added to confusion, as it includes sectors without any immediate connection to national security, for example tractors, medical equipment, environmental protection, recycling, wholesale trade or retail. Second, the regulations invite industry associations, competitors, and suppliers to request a national security review of specific transactions. This is in stark contrast with international practices and seems misplaced given that China already has a competition policy regime through which stakeholders can voice concerns regarding foreign takeovers. While the new regime has not yet been tested, foreign investors are concerned that the new screening mechanism will further lower their chances of entering the Chinese market through acquisitions.

More positive news comes from the competition policy arena and global mergers and acquisitions control. In Q3, Nestle received unconditional clearance for its 60% stake in Chinese food producer Yinlu Foods Group. MOFCOM also approved Berkshire Hathaway’s takeover of specialty chemical company Lubrizol and National Semiconductor’s takeover of Texas Instruments. In addition, MOFCOM in September published the “Interim Provisions on the Evaluation of the Impact of Concentrations of Business Operators on Competition”, which outline the principles of merger reviews under the Anti-Monopoly Law (AML). The document reaffirms that MOFCOM’s reviews are moving closer towards alignment with international best practices. However, the document is still very broad and does not clarify important metrics, for example which levels of Herfindal-Hirschman Index of market concentration MOFCOM considers high. It also supports concerns that broader industrial policy considerations can influence AML decisions by explicitly referencing “public interest” and the “sound development of relevant industries” as factors for its competition policy decision-making.

China also shows increased readiness for international collaboration on competition policy implementation. After signing a Memorandum of Understanding (MoU) with the UK’s Office of Fair Competition earlier this year, China’s three main competition policy bodies – the Ministry of Commerce (MOFCOM), the National Development and Reform Commission (NDRC) and the State Administration for Industry and Commerce (SAIC) – in July signed a MoU with the United States on increased cooperation and coordination on global merger reviews. In late November, Chinese and U.S. officials met in Washington and agreed on a set of principles for cooperation between antitrust agencies on both sides.


Total Chinese FDI expenses in the U.S. in the first three quarters of 2011 add up to $4.2 billion. The volume for deals closed in Q4 to date is relatively modest, but there are a few large-scale deals on the horizon, for example a $2 billion stake by one of the major Chinese oil companies in U.S. shale-gas services company Frac Tech, or a $1 billion takeover offer by Shandong Gold of Jaguar Mining. A potential takeover bid for Yahoo by a consortium led by Chinese B2B platform Alibaba would be valued at more than $20 billion.

The policy focus in Q4 2011 has shifted back to Chinese investment in critical U.S. infrastructure. China’s sovereign wealth fund expressed its interest in investing in U.S. and European infrastructure. Chinese investment in telecommunications infrastructure has come under renewed scrutiny in light of cyber-attacks originating from China. The House Intelligence Committee launched an investigation of the global telecom supply chain and potential security threats to the U.S., which is targeting Chinese suppliers such as Huawei and ZTE. A bid by Alibaba for Yahoo would certainly push the debate on Chinese investment in U.S. IT infrastructure and services to a new level.