China’s investments in the US are growing. Should we be concerned?

By Steven Hill, The Guardian, January 24, 2014

A majority of Americans believe China poses the greatest threat to the US economy. Such fears are unwarranted

Leaked documents this week revealed what many already knew: Chinese investors are storing their money – and investing – more and more overseas. China’s rich and powerful seem to prefer the British Virgin Islands for their offshore transactions, but the US and Europe remain top destinations for their actual investments. The question is: should we be concerned?

Polls show that a majority of Americans believe China poses the greatest threat to the US economy, and a third aren’t comfortable with any investment by Chinese firms into US companies. In the past, the US government has killed Chinese investments in American companies, such as an infamous deal where China’s state-owned CNOOC tried to buy petroleum company Unocal corp for $18.5bn in 2005.

On the one hand, people look at the high-profile investments that China is making in the west, especially US real estate, and they question whether such iconic places should be in a communist country’s hands. In the Big Apple, Beijing real-estate tycoon Zhang Xin led an investment group’s $1.4bn purchase of the General Motors office tower last year, a 50-story monster that reportedly is the most expensive building in the US. Another headliner was Fosun International Ltd’s purchase of the landmark building One Chase Manhattan Plaza for $725mn from JP Morgan Chase. Anticipating a surge in Chinese commercial activity, Fosun billionaire co-founder Guo Guangchang projects that eventually his company will fill as much as one-third of the building with Chinese companies. No doubt they will be assisted by the China Center (CCNY), a pro-business headquarters for Chinese investors and companies seeking to gain a foothold in the US. CCNY will be one of the biggest tenants in the new One World Trade Center (the site of the 9/11 terrorist attack), taking up six floors and 190,000 square feet of office space.

This kind of investment is good for New York City, and a sign of Chinese investors’ confidence in the Big Apple during a time of economic uncertainty.

But money from China isn’t just flowing into big time projects in Manhattan. It’s also going to unlikely places, such as bankrupted Detroit, where financing is badly needed. Motown has become the fourth most popular US destination for Chinese real estate investors (behind New York, Los Angeles and Philadelphia). With thousands of homes foreclosed, some two-storey homes have been auctioned off for as little as $39. This attracted attention in China, with state broadcaster China Central Television reporting that houses in Detroit cost the same as “a pair of leather shoes”.

Chinese investors have made bulk purchases of dozens of cheap homes in the urban rings surrounding the city center, many of them bought without even having been seen. Then Dongdu International Group of Shanghai bought two downtown icons: the Detroit Free Press building for $9.4mn and the David Stott building for $4.2mn. Yes, Chinese investors have purchased the former headquarters of the free press in Motor Town.

Most of these investments should be welcome, not only in the US but also in Europe. Indeed, Europe has attracted twice as much Chinese investment as the US, as investors have seized commercial opportunities arising from the eurozone crisis. The Chinese have been providing fresh capital when western investors are tapped out or weary of troubled places like Detroit or Greece. This is a sign of China’s further integration into the global market, and should be welcomed, not feared. The more the Chinese invest abroad, the more they have reason to want to partner with western countries and see them succeed.

But it goes beyond that. Americans need to understand what’s driving Chinese investors. Many have begun looking abroad because of tight policy measures by China’s communist government aimed at cooling off the country’s overheated real estate market.

Some experts also believe that the parking of wealth offshore may indicate an increase in capital flight from China. A study conducted by Bank of China and Hurun found that more than half of China’s millionaires have taken steps to emigrate or are considering doing so. Chinese individuals already have stashed offshore anywhere from $450bn to $658bn in assets, with Boston Consulting predicting that amount will double in three years. CNBC recently called the movement of Chinese capital “one of the largest and most rapid wealth migrations of our time“. That’s not a strong sign of Chinese investors’ confidence in their own country.

On the other hand, the Chinese have only 13% of their wealth outside China, while the global average is 20% to 30%, according to Oliver Williams of WealthInsight. In a developing society like China, it’s normal for the wealthy to geographically diversify their investment portfolios and send more of their wealth abroad.

While there’s something ironic about investors from the land of “communism-capitalism” exploiting the west’s economic vulnerabilities to snatch up valuable properties, that’s how capitalism’s “creative destruction” is supposed to work. Adam Smith would be pleased.

Unfortunately, the Chinese seem to want to play both sides of the coin. The Chinese government doesn’t allow foreign investors to acquire properties of significance, whether real estate or companies. Other investment restrictions and requirements are applied to foreign enterprises in China, such as usually requiring foreign companies to enter into joint venture agreements with local Chinese partners.

While some consideration should be given to the fact that China is still a developing nation, in general East-West relations should live by the Investor’s Golden Rule: “Invest in others as you would have them invest in you.”

This principle should be enshrined in trade agreements, and be part of the findings whenever US or European regulators consider whether to approve Chinese investments.

The world should welcome China’s further integration into the global market, since the more Chinese and western economies are integrated, the more it will build political bridges and diffuse tension. But the rules have to be fair and equal, and right now, they’re not. China should be nudged to further open its economy. What’s sauce for the goose is sauce for the gander.