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Why China wants a piece of the U.S.

Welcome, year of the dragon!

The Chinese New Year is a time of family reunion and feasting. So why do I loathe it?

I’m expected to return to my native China to visit family and friends and celebrate the holiday. These supposedly fun vacations are normally packed with “business consultation” meetings about buying properties or setting up sales offices in the U.S.

In the 1990s, my brother, who headed an ailing state enterprise in central China, would introduce me to his entrepreneurial friends. Over sumptuous meals, they bombarded me with questions about how to get American businesses or wealthy individuals to invest in Chinese ventures, from medical equipment and golf courses to cooking utensils and soft drinks.

But that’s all changed. In recent years, as China’s economy boomed, their questions have switched from seeking American investment in China to looking for opportunities to invest in America.

China’s outward direct investment (ODI) is growing fast, despite an overall decline in the developed world. In 2010, China ranked fifth in outward investment with $68 billion, surpassing traditional investment giants such as Japan ($56 billion) and the United Kingdom ($11 billion). Chen Deming, China’s Minister of Commerce, predicts that China’s ODI will grow by 30% annually and outpace its inward investments from other countries within three years.

And the mix of public and private investment from China has begun to shift. Since the government began to gradually ease its ODI restrictions five years ago, many large and medium-sized, privately owned companies have joined the race. Among the top 500 private enterprises in China, 154 invested overseas in 2011, making up about 11% of China’s total outward investment.

The cash-rich Chinese businesses expect 2012, the year of the dragon, to be another big year and they are eyeing cheap targets in the U.S. and the European Union. “We hope our expansion will be like a flying dragon that lands solidly on foreign soil,” quipped a Shanghai-based entrepreneur.

Pushed out by China

While state-run enterprises want access to raw materials, advanced technology and managerial skills to meet China’s long-term development needs, private companies have different motives for setting up shop in the U.S. Some want to sell their goods locally in the U.S. or set up the functions needed to re-export to other countries. Others come looking for new technologies to improve their productivity. And a few ambitious clothing and toy manufacturers, as well as automakers, hope to create their own independent brands overseas.

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James Wen, an economist at Trinity College in Hartford, Connecticut, says the recent push by private enterprises also reflects tougher conditions in China, where the administration favors mega state-owned enterprises. At the height of the financial crisis in 2008 and 2009, the Chinese government allocated a lion’s share of its $586 billion stimulus money to local governments and state enterprises, offering them generous tax breaks and preferred access to land and state bank loans. Private companies face discrimination and unfair competition from state enterprises.

And so they looked elsewhere. Liu Junhai, an expert on overseas investment at the Beijing-based Renmin University, says most private companies in China put the U.S. as their top destination because of its “mature and transparent capital market, independent and comprehensive legal systems, advanced technology and high-quality workers.” Recent successes by companies like Lenovo, which purchased IBM’s PC division, and SANY, a large Chinese concrete machinery manufacturer that opened up a plant in Georgia, have reinforced the perception.

Culture clash?

China’s ODI in the U.S. has increased from $1.2 billion in 2008 to $6.5 billion in 2011. In California alone, Chinese companies have recently purchased the Marriott Hotel in downtown Los Angeles, the Sheraton Universal Hotel in Universal City, and the Balboa Bay Club & Resort and the Newport Beach Country Club in Newport Beach. Meanwhile, a Chinese investor has acquired the Riverside, California-based MVP RV to export recreational vehicles to China.

Despite these reported or under-the-radar investments, the amount is still relatively small compared to China’s overall ODI. Investment in the U.S. makes up just 3% to 4% of China’s total ODI activities. Nearly 90% still goes to projects in Asia, South America and Africa.

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That may be because it’s not always easy. While the Chinese government’s cumbersome approval and review process has restricted the volume of investment in the U.S, the recent “regulatory scares” in the U.S. have not helped either, says Liu. In 2011, the Committee on Foreign Investment in the United States cited “national security” concerns when it blocked several major acquisitions by Chinese state-run enterprises Huawei Technologies, the world’s second-largest supplier of mobile telecom infrastructure equipment, the Chinese Anshan Iron and Steel Group and China’s aviation giant General Aircraft. “The seemingly discriminatory actions have deterred companies, both in the public and private sectors,” adds Liu.

Joe Zhang, a New York-based clothing manufacturer from China, who started his business in the U.S. in the late 1980s, believes private enterprises will have a relatively easier time with regulators. “The scope of private investment is smaller, and their targets are limited to industries such as clothing, automobiles, commercial and residential real estate, finance and home electronics, none of which is likely to be blocked by Congress,” he says.

There will be challenges, both culturally and financially. Indeed, some entrepreneurs who have made a mint in China are guided by a misperception that they could strike it rich in the U.S. in a few years and then leave. “It is true that there are many opportunities here; competition is at every corner, but it’s transparent and fair. If you don’t have a long-term vision and invest in your core business, you will not succeed,” Zhang says.

For American companies and individuals dealing with private Chinese investors, Zhang extols the virtue of patience and recommends the use of an intermediary, one who not only speaks the language, but who also understands the business. He also suggests that Chinese companies set up joint ventures, like what Americans did in China during the 1990s and let locals run the operations.

Comparing China’s recent global expansion with that of South Korea and Japan in the 1990s, Zhang says the outward trend will be irreversible. In the next twenty years, when Chinese companies have acquired new knowledge and ideas, Zhang predicts the emergence of many Chinese versions of Samsung, Hyundai and Sony.

If I could be sure which of my brother’s friends were behind those companies, I would be happy to help.