Mr. Hu goes to Washington, and Promises Chinese Investments!

The recent official state visit to Washington, DC, by China’s President Hu Jintao, was as boring and as uneventful as all the experts expected to be but hoped it would not.  President Obama pulled out the red carpet for President Hu, with all the majesty and fanfare that the Chinese leader ‘deserves:’ two dinners at the White House, a luncheon, and a 20 gun salute.  Sure there were some moments worth reporting: a joint press conference, President Obama’s tough talk about the undervalued renminbi, two questions and one answer on human rights in China (technical difficulties aside).  But as we all expected, no real breakthrough… no real developments in this very important and very volatile economic and geopolitical relationship.

There were of course the obligatory announcements by the Chinese President of purchases by China of American made Boeing airplanes and tons of U.S. soybeans.  In particular, during Hu’s visit, China announced that it would purchase $45 billion in U.S. exports, including a $19 billion deal for 200 Boeing airplanes.  In addition to the Boeing deal, China will also invest in U.S. exports from agriculture, telecommunications and technology companies, including General Electric, Honeywell and Navistar.  The White House said the deals will support up to 235,000 jobs in the U.S.  When President Hu visited Chicago, he also announced the purchase of $6.7 billion worth of soybeans (11.5 million tons of soybeans), the biggest ever one-time US purchase, and about 20% of China’s last year’s purchase of soybeans from the U.S. (54.8 million tons).

However, of all the diplomatic platitudes for greater cooperation, exchanged during President Hu’s trip, the one about further Chinese investments in the U.S. is worth exploring further.  If China and the U.S. are going to rebalance their economies in the eve of the global financial crisis (as they should), then China will have to do more than just go on a shopping-spree every time its high-level officials come to Washington.  China will have to invest some of its hard earned dollars back in the U.S. economy and generate some much needed jobs.

From the U.S. perspective, foreign investment generally translates into jobs.  White House officials see potential for foreign companies to build manufacturing plants in the U.S., despite higher U.S. labor costs, to bring goods closer to consumers in the world’s largest economy.  To that end, the trends are encouraging.  Up until 2008, Chinese companies had invested less than a total of $5 billion in the US, while US companies had made $50 billion in capital investments in China.  Since 2009, Chinese investments in the US have increased exponentially to $12 billion.

The possibility of further Chinese investment in the U.S. were discussed during President Hu;s state visit to Washington, between Chinese business leaders and the American president.  A small number of Chinese companies have set-up operation in the U.S. over the years, the most prominent of which is Wanxiang International, an auto-parts giant which over the past decade has purchased or invested in more than 20 U.S. firms, employing more than 5,000 Americans.  Then there is Lenovo, one of the most active Chinese investors in the U.S., with some 2,000 employees in the country. It set a milestone for Chinese investment in the U.S. with its 2005 purchase of International Business Machines Corp.’s PC business.

Other Chinese companies looking to expand operations in the U.S. include: Dalian Machine Tool Group Corp. (looking to build a new plant in the U.S. that will employee 200 people), BFM Fire & Security Inc. (may start manufacturing fire extinguishers in the U.S.), LDK Solar Co. (plans to build a new plant in California), and Tianjin Pipe Group Corp. (planning a $1 billion plant on the Texas coast).  According to some estimates, Chinese companies that have already invested in the U.S. are employing 10,000 Americans.

Another area where Chinese companies are considering stepped-up investment in the U.S. is infrastructure.  During the two Presidents meeting, President Barack Obama and the head of China’s Investment Corp., the country’s $300 billion sovereign-wealth fund, talked about the Chinese investing in infrastructure projects in the U.S.  CIC has made infrastructure investments before.  In March, it finalized a deal to pay $1.58 billion for a 15% stake in AES Corp., a major U.S. power generation and distribution company.  However, considering the politically sensitive nature surrounding the Chinese ownership of key infrastructure projects, such as an airport or a toll road. U.S. officials have encouraged the Chinese to be thoughtful about how they approach this and consider taking minority, passive stakes in larger projects.

Then, there is Huawei Technologies Co., which has been trying to expand in the U.S. market unsuccessfully.  Last May, Huawei acquired for $2 million deal the U.S. server-technology firm 3Leaf Systems.  The California start-up developed technologies for making groups of computer servers work together, forming a more powerful machine.  Although the transaction was small, 3Leaf had already raised $55 million in venture capital from Intel Capital, LSI Corp. and other investors.

Now, the Committee on Foreign Investment in the U.S. (CFIUS), has commenced an investigation into the deal, due to security concerns that the U.S. Defense Department and some lawmakers have about Huawei’s possible ties to the Chinese government, and in particular the People’s Liberation Army.  CFIUS, an inter-agency committee responsible for reviewing the national security implications of foreign investments in U.S. companies, is chaired by the secretary of the Treasury and includes representatives from 16 U.S. departments and agencies, including the Defense, State and Commerce departments, as well as the Department of Homeland Security.  Foreign investments must clear regulatory hurdles under certain circumstances, including when there are national-security implications.  CFIUS has already put a stop to a much bigger deal from Huawei and Bain Capital’s to buy electronics manufacturer 3Com in 2008.

In 2009, one of the biggest Chinese investments – a $1.08 billion injection from a Chinese oil company, CNOOC, into a Texas venture – raised concerns that the firm was making the deal to obtain U.S. shale oil technology, which it would then use to compete with American firms overseas.  CNOOC’s investment into the shale oil fields marked the first time it had returned to the United States since its attempt to buy a U.S. oil firm, UNOCAL, was blocked in 2005 by CFIUS.  At the time, some lawmakers objected to the prospect of a Chinese firm owning U.S. oil assets.

U.S. suspicion and ambivalence of foreign investments is not a new phenomenon.  Thirty years ago, another Asian exporting powerhouse faced the same problem.  Like China, Japan had an enormous trade surplus with the United States and was being attacked over unfair trading practices.  Then Japanese firms began pouring money into the U.S. economy.  In 1980, Japan had $8.7 billion invested here.  A decade later, the investment was up to $83.1 billion.  While there was scare-mongering about a Japanese takeover of the U.S. economy, more than 50 congressional districts have benefited from Japanese investments.

But unlike Japan, which came to the United States with well-established brands such as Toyota, Honda and Sony, China has only a handful of companies that Americans might recognize. So while Japanese firms invested with the intent to produce already-popular goods for the U.S. market, Chinese companies are primarily seeking American technology, management and ideas.  That has opened China to allegations of corporate piracy.

America needs foreign manufactures to move operations in the U.S., and China needs legitimacy and expansion of its domestic name-brands.  For once, all the rhetoric of global cooperation and mutual acceptance could come to fruition and truly benefit both societies.  China should increase its investments in America, and the U.S. should be more welcoming for its own good.  A win-win, for both nations!