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Chinese FDI in the United States: Q4 2011 Update

Chinese direct investment in the United States dipped to $69 million in Q4 2011, dragging down the full year figure to $4.5 billion. This is a slight drop from last year’s $5.2 billion and significantly lower than figures for Europe, where Chinese investment surged to a new record high of almost $10 billion. This note summarizes the trends of Chinese U.S. investment in Q4, analyzes key transactions, and discusses the most important policy developments impacting US-China investment relations.

Slow momentum in Q4: Chinese investment in FDI projects in the United States plunged to only $69 million in Q4 2011, a 3-year low. The weak deal flow in Q4 dragged down the full year 2011 figure to $4.5 billion, a slight drop from the $5.3 billion in the previous year.

Stark contrast to investment boom in Europe: While U.S. investment remained largely flat last year, Chinese investors spent almost $10 billion on FDI projects in the EU-27 in 2011, a threefold increase from just $3 billion in 2010.

New policy headwinds: OECD governments are increasingly pressuring China to grant reciprocity in market access. American and European policymakers are also assessing potential market distortions from increasing investment by state-owned enterprises and risks from Chinese participation in telecommunications networks and other critical infrastructure.

Trends and Patterns

In Q4 2011, Chinese companies spent $69 million on 12 FDI projects in the United States (see Figure 1). We recorded 7 acquisitions, which is broadly in line with previous quarters. The combined value of these acquisitions ($32 million) is significantly lower than in previous quarters because large-scale transactions were missing and average deal sizes were smaller. The number of greenfield projects dropped to only 5, with a combined value of just $37 million. The total investment volume of $69 million is the lowest quarterly value since Q4 2008. However, this should only be a temporary dip as flows have recovered again in Q1 2012 (see outlook at the end of this note).

With five new investments, California once again tops the ranking of Chinese FDI projects in Q4, followed by Texas with two new projects. Chinese investors continue to target a wide range of different industries, but the service sector accounted for the majority of deals in Q4. The biggest deal was WuXi Pharma’s acquisition of California-based biotech firm Abgent for an estimated $20 million. Other industries targeted include financial services, recycling, retail, renewable energy and food. Please visit RHG’s China Investment Monitor website to explore the patterns of Chinese investment by state, industry and ownership in 2011 and previous years.

The weak fourth quarter dragged down the full year figure for Chinese FDI in the U.S. to $4.5 billion, a slight drop from last year’s record amount of $5.2 billion. While this is in line with China’s flat global outward FDI in 2011, it is a stark contrast to the picture in Europe, where investment has surged threefold since last year, hitting an all-time record high of almost $10 billion (Figure 2). A mix of very attractive industrial high-tech assets, firms with highly skilled workforces, opportunities arising from fiscal consolidation and corporate restructuring, and a favorable policy environment were major drivers for strong growth of Chinese investment in Europe. Due to the low base and volatility, it is too early to conclude that Europe has won the race for Chinese investment, but the US is currently coming in at second place.

Key Transactions

In November 2011, the Bank of Communications (BOC) opened its second U.S. branch in San Francisco, signposting the growing expansion of Chinese banks in the U.S. economy. Chinese financials have retained a low profile in the U.S. to date, but they are expanding their presence quickly. By September 2011, Chinese banks had established 14 branches or offices in the United States (Table 1). Total assets of Chinese banks in the U.S. have grown from less than $10 billion in 2008 to more than $20 billion in 2011. All of China’s big five banks are present in the U.S. market, with Bank of China accounting for the majority of assets. Important smaller players such as China Merchants Bank or CITIC Bank have also established a presence in North America. Most branches are located in the nation’s financial capital, New York, but cities on the West Coast with large ethnic Chinese populations also attract interest.

In addition to organic growth through greenfield investments, Chinese financials have also started to expand in the U.S. market via acquisitions. In 2010, China’s Industrial and Commercial Bank of China (ICBC) snapped up the prime dealer services unit of Fortis Securities from BNP Paribas SA for a symbolic price of $1. In 2011, ICBC announced the purchase of Bank of East Asia’s U.S. operations for $140 million, the first Chinese acquisition of U.S. retail banking assets. The transaction is currently under review by the Federal Reserve, which has to give its nod under the Foreign Bank Supervision Enhancement Act of 1991. If approved by the Fed, the transaction would open the door for more Chinese banking acquisitions in the United States.

China’s big commercial banks are now among the world’s largest banks. However, their business has been almost exclusively focused on the home market in the past. Banks have very few assets outside of China and Hong Kong and close to 100% of their net revenues come from Chinese operations (Figure 3). As with other firms, the comfortable situation in the domestic market gave them very little incentive to go abroad. China’s financial system, which is based on the repression of households and government-controlled interest rates, has put state-owned lenders in a situation to comfortably grow revenue and profits at home. However, certain real economy developments and challenges on the horizon are increasingly incentivizing banks to give up this inward focus and start looking overseas.

First, banks are increasingly forced to follow their clients abroad. With a greater number of Chinese firms expanding overseas, Chinese banks need to establish overseas branches to continue serving these clients. Second, their clients increasingly demand financial services and products that require an international presence. The scope of banks is expanding from traditional lending to complex risk management, investment banking, wealth management and other activities for which China’s archaic financial and legal system does not provide the right institutional basis. Third, Chinese banks urgently need to go abroad to learn and strengthen their skills and competitiveness. China’s big state-owned banks are, as former PBOC advisor Li Daokui put it, “dinosaurs” who significantly lag behind foreign banks and domestic private players with regard to skills and human talent. Facing a domestic rebalancing process that will involve reforms in the financial sector such as liberalization of interest rates and a gradual relaxation of investment restrictions for private banks and foreign players, China’s big four banks will be forced to leave their comfort zones and catch up. Overseas acquisitions and foreign operations will be a part of this learning process.

Policy Developments

On the international level, the U.S. government is taking a tougher stance toward China’s international economic policy.  At the APEC meeting in November 2011, President Obama told China to behave like a “grown up” economy and “operate by the same rules as everyone else”. He warned that “the United States can’t be expected to stand by if there’s not the kind reciprocity in our (…) economic relationships that we need”. With regard to the U.S.-China investment relationship, the United States is particularly concerned about existing investment restrictions for foreign businesses, formal and informal discrimination against foreign companies in China’s domestic marketplace, and the use of investment requirements to reach industrial policy goals, such as technology transfer requirements in strategic industries like electric vehicles. Despite the debt crisis, Europe’s leaders have also intensified calls for greater investment reciprocity in bilateral economic relations with China, which points to greater international pressure on China in the future to accelerate its efforts to open up and level the playing field for foreign businesses.

In addition to reciprocity demands, the debate on potentially distorting impacts of investment by state-owned enterprises (SOEs) has clearly picked up. In the U.S. debate, there are a wide range of domestic proposals for how to make SOEs play by the rules and avoid distortions of market-based competition, including increased monitoring and transparency requirements, a strengthening of U.S. antitrust legislation to tackle the risk of predatory pricing, revision of U.S. trade remedy laws to address tariff-jumping concerns, an expansion of the CFIUS review process to include economic considerations such as the “net benefit” test in Canada, or a post-market entry performance assessment. On the international level, potential strategies include relevant provisions in investment and trade agreements and common guidelines for SOE behavior, either within the OECD framework or as separate agreements modeled after the Santiago principles for Sovereign Wealth Fund investments. There are similar discussions in Europe to discipline investment behavior of SOEs, through, for instance, greater disclosure requirements or an expansion of the EU Commission’s state aid monitoring system to third countries.

Another focus of American lawmakers and security circles in the fourth quarter was the protection of critical U.S. infrastructure against alleged Chinese cyber-attacks.  In October 2011, the Office of the National Counterintelligence Executive issued a report portraying the Chinese government as an “aggressive and capable collector of sensitive US economic information and technologies”. Media and national security advisors have echoed such accusations and called for new measures to protect U.S. government and firms from Chinese cyber-attacks. Lawmakers have accelerated their work on comprehensive cyber security legislation. In December, the House Homeland Security Committee came up with a proposal for a national clearinghouse for information on potential attacks on critical infrastructure under the Department of Homeland Security. In November, the House Intelligence Committee separately launched an investigation into national security threats posed by Chinese telecom companies working in the US, explicitly targeting Chinese suppliers of telecommunications equipment such as Huawei and ZTE.

Finally, a report released by the Treasury Department in December offers some insights on the investment screening work of the Committee on Foreign Investment in the United States (CFIUS) in 2010. In line with a rebound in inward FDI after the 2009 crisis year, the number of covered transactions grew from 65 in 2009 to 93 in 2010 (Figure 4). Firms from the United Kingdom (26), Canada (9), Japan and Israel (7) had to clear the most cases. In 6 of the 93 covered transactions the buyer was a Chinese-owned entity (Figure 4). CFIUS conducted an investigation of 35 of the 96 submitted cases. 23 cases were cleared and 12 were withdrawn. Of the 12 notices withdrawn by the filing parties, 7 were resubmitted and 5 transactions were permanently abandoned.

On the Chinese side, the most important policy development was the publication of the new “Foreign Investment Industrial Guidance Catalogue” in December 2011. The guidelines, which were jointly drafted by the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM), determine in which sectors of the Chinese economy foreign investment is welcome (“encouraged” industries), in which it is allowed under certain conditions ( “restricted”), and in which is completely forbidden (“prohibited”). The new catalogue, which replaces the 2007 version, improves access for foreign investors in certain sectors, including advanced manufacturing, energy conservation, renewable energy, new materials and various service industries such as healthcare and financial leasing. Several industries have been removed from the list of encouraged industries (including auto manufacturing and polysilicon production) and others have been newly blacklisted (such as the construction of luxury villas or domestic mail courier services). In sum, the new Catalogue mirrors China’s past approach to inward FDI policy: it continues with gradual liberalization by opening up additional industries to foreign investors, while simultaneously maintaining a tight grip on sectors with pronounced industrial policy goals. Major surprises and steps to open up contested sectors such as financial services are missing from the new 2011 Catalogue.

Meanwhile, real economy developments in Q4 forced the Chinese leadership to accelerate the relaxation of capital account controls. The inflow of both foreign exchange and FDI dropped in the fourth quarter of 2011 to levels not seen since the financial crisis, reflecting serious fears about the state of the Chinese economy in H2 2011 (Figure 5). Policymakers reacted to such capital flight concerns by boosting quotas for portfolio investment inflows under the Qualified Foreign Institutional Investors (QFII) scheme and significantly increasing quotas on cross-border loans by foreign banks into China. While things seem to have recovered in Q1 2012, these reactions show that Chinese leaders are very pragmatic in using capital control liberalization to boost investor sentiment in periods of low confidence. If concerns about the Chinese economy should resurface in 2012/2013, the Chinese leadership might be forced to take that route again – including opening up sectors which are currently off limits to foreign investors.

China’s competition policy and global merger control continued to draw international attention. In November an anti-monopoly investigation by the NDRC into China Telecom and China Unicom’s broadband network practices signaled a tougher application of competition policy at home and against state-owned enterprises. At a press conference in December, MOFCOM’s Anti-Monopoly Office offered some insights on its work on global merger control in 2011. MOFCOM officials said they received 194 notifications between January and mid December 2011, up 43 percent from 2010. It accepted 179 cases and completed the reviews of 160 cases by mid December 2011. Of these 160 cases, 151 were approved unconditionally, 4 were approved conditionally and 5 cases were withdrawn by the notifying parties. In Q4, MOFCOM unconditionally cleared a series of high profile transactions, including Nestle’s stake in Hsu Fu Chi, Yum’s takeover of Little Sheep and the Ecolab-Nalco merger. Two transactions – Seagate’s acquisition of Samsung’s HD assets and a joint venture between General Electric and Shenhua were cleared with conditions.


The weak fourth quarter of 2011 does not mean that Chinese investment interest in the United States has come to a halt. Inflows in H1 2012 should rebound significantly given several already closed transactions with a large scale, such as Sinopec’s $2.5 billion shale gas investment. The Chinese oil giant agreed in early January to pay $900 million for a stake in Devon Energy’s five shale oil and gas fields in the U.S. and committed to finance up to US$1.6 billion in future drilling costs. Other deals in the pipeline for H1 2012 include a $100 million copper tubing plant in Alabama by Golden Dragon, the potential sale of AES’ wind power generation assets (valued at $1.65 billion) to China State Grid, and a $5 billion mega solar project by ENN Mojave Energy Corporation in Nevada.