The recent $1.95 billion acquisition of the iconic Waldorf Astoria Hotel in New York by a private Chinese insurance company, Anbang, grabbed news headlines around the U.S. What attracted attention was not just the price paid by the Chinese investor ($1.95 billion was the highest price paid for an existing hotel in the U.S.), but the identity of the purchaser, China’s eighth-largest insurance conglomerate, owned by the grandson-in-law of the late Chinese leader Deng Xiaoping.
As with other high-profile Chinese deals (such as Shuanhui’s acquisition of Smithfield Foods for $4.7 billion in May 2013), the Waldorf Astoria transaction raises important business and policy questions: what is driving Chinese foreign direct investment (FDI) and what is the best response to this important development?
The rise in Chinese non-financial investments in the U.S. is no accident. Powerful economic forces are driving Chinese investors to the U.S. and elsewhere. According to the Chinese Ministry of Commerce, China’s outbound investment has soared in the last decade. In 2002, only $2.7 billion in FDI flowed out of China. But in 2013, China poured $108 billion into direct investments overseas. This year, the Chinese government estimates that Chinese FDI will reach $120 billion. Cumulatively, the total stock of Chinese FDI has grown from $30 billion in 2002 to $660 billion today. Of this amount, however, the bulk—nearly 60%—has been invested in Hong Kong, the British Virgin Islands, and the Cayman Islands. (Presumably, Chinese investors prefer to use these three jurisdictions as transit routes for investing overseas.)
The forces behind outbound Chinese FDI are nearly identical with those that lured Japanese investors overseas three decades ago. China has excess savings (such as its stockpile of $4 trillion in foreign exchange reserves). The valuations of assets in the U.S. and Europe are attractive. For private Chinese investors, acquiring foreign assets delivers more than decent returns. With China’s political uncertainty and poor protection of private property, investing in the U.S. and Europe helps diversify their risks and, as a bonus, offers a chance to gain permanent residence through immigration programs designed to attract FDI in these countries (Chinese investors now account for 85% of the 10,000 EB-5 visas issued by the U.S. to foreigners who invest more than $500,000 each).
While rising investment from China should be welcome, politicians and the business community in destination countries are concerned about security and fairness. Anxiety over such issues may be excessive but not illegitimate since Chinese state-owned companies account for 60% of all Chinese FDI. Those worried about potential security threats posed by Chinese investments in sensitive areas (such as high-tech, communications, and energy) point to Beijing’s declared strategy of “going out” to gain technology and resource security as grounds for scrutinizing Chinese investments. However, by and large, the U.S. door remains wide open to Chinese investments. Only in rare cases have political opposition and national security concerns sunk proposed transactions. The most infamous ones include the failed attempt to buy Unocal by Cnooc, a Chinese state-owned energy giant, in 2005, and the aborted deal by Huawei, China’s leading telecom equipment maker, to purchase 3Com in 2008.
Perhaps aware of the potential opposition they may encounter in the U.S., most Chinese state-owned enterprises have wisely shied away from buying U.S. assets. Data collected by the Rhodium Group, a New York consultancy, show that private Chinese firms accounted for 70% of the $14 billion of Chinese direct investment in the U.S. in 2013. According to the Chinese Ministry of Commerce, the U.S. is actually the most popular destination for Chinese FDI after Hong Kong, the British Virgin Islands, and the Cayman Islands. Smart money—Chinese private capital—prefers the U.S. over other destinations.
However, the same numbers also indicate that the U.S. would have attracted even more private Chinese capital if the right steps were taken by the private sectors, not the governments, in both countries.
At the moment, all focus is on the completion of the U.S.-China Bilateral Investment Treaty (BIT), which will create more transparent rules for approving investments in both countries. Unfortunately, negotiations over the treaty are stalled. In the meantime, a flood of capital—estimated to be $2 trillion in this decade, according to the Rhodium Group—will be rushing out of China in search of attractive deals.
Contrary to conventional wisdom, the greatest obstacle to outbound Chinese FDI is not protectionism or discrimination, but the dearth of local knowledge, management skills, and sophistication among Chinese investors. According to the former chairman of the supervisory board of China Investment Corp., China’s sovereign wealth fund, 70% of China’s investment overseas is “unsuccessful.”
Such an abysmal record can mean only one thing—Chinese investors need professional help. And American companies are in a good position to supply it.
Minxin Pei is the Tom and Margot Pritzker ’72 Professor of Government at Claremont McKenna College and a non-resident senior fellow of the German Marshall Fund of the United States