What do you get when the largest developing country in the world is investing more and more in the world's largest developed economy? Lots of question marks and a few deals.
Chinese investment in the U.S. market is a hot topic. U.S. companies and entrepreneurs are trying to understand the best way to access Chinese financial resources in order to leverage their potential. Chinese investment in the U.S. market amounted around $6.5 billion in 2012 and growing. As a new administration is taking over in China, it is a good opportunity to reflect on the potential impacts on Chinese interest in the U.S. market.
The Chinese Ambassador to the U.S. in his welcoming reception said it explicitly with respect to China-U.S. relations 3 weeks ago: "What has been driving our relations is the ever-expanding converging interests between our two countries...together, China and the US account for one-third of the world's economy, one quarter of the world's population, and one-fifth of the world's trade volume. To keep a healthy, stable and growing relationship is not only a must for our two countries, but also a shared commitment to the international community that we have to fulfill together."
Yet, in recent polls Chinese investors rank the U.S. as the toughest place to conduct business and U.S. regulation as the second most challenging factor driving an investment decision. 2012 was the first time the U.S. President blocked a deal by a Chinese buyer (the Rolls Corporation), and Huawei and ZTE have been subject to intense investigations by U.S. Congress. The U.S. Administration imposed new tariffs on many new Chinese products, such as solar panels. I had the opportunity to address both Chinese and Americans audiences on this topic recently and people are quite concerned.
It is not the place to list all the benefits of outbound Chinese FDI into the U.S. market. It is sufficient to remind ourselves of the need to circulate the significant U.S. dollar foreign exchange reserves in China and the structural liquidity challenges in the U.S. market, among other factors. Investors wonder what needs to be done to make sure that the rising Chinese FDI trend will continue in spite of all these bumps on the road. Here is some food for thought.
First, the U.S. and Chinese Authorities do not agree on the methods and numbers behind calculating Chinese foreign direct investment in the U.S. A better coordination and agreement will provide parties on both sides with better data necessary for investment decisions.
Second, Chinese investors approaching the U.S. market are bombarded with counsels and advisors, especially since they perceive the U.S. regulatory framework as highly complicated and often unclear. Reliable advisors are a critical component. Some institutions do help in this process, such as the Chamber of Commerce and the new SelectUSA program of the Department of Commerce, but in general the introduction process to the U.S. market is too fragmented, de-centralized, and inconsistent. While we understand the unique characteristics of the Chinese business culture and its information sharing practices, advisors should avoid over-promise and under-deliver, since, in reality, Chinese investors do present unique opportunities and challenges in the U.S. market, and unreliable experience could negatively impact interest on the Chinese side in the future.
Third, the CFIUS process that screens potential acquisitions in the U.S. involving control in sensitive industries should be more transparent, providing Chinese investors with the clarity and consistency so needed for corporate decision making. The perception that any interest in the U.S. market can turn into 'sunk costs' does not create a healthy investment environment. If certain industries are practically closed to Chinese investors, they should know about it in advance to reduce costs, time, and efforts. Russia adopted similar rules in their 'strategic industries' legislation. U.S.' commitments to international economic obligations, such as the WTO rules, are not always reflected in governmental administrative decisions.
Finally, the Chinese investment process tends to be slower, step-by-step, building upon trust and relationships. Americans are looking for a quick fix, seeking financial returns. It requires a considerable mental shift before the FDI levels rise significantly.
The new Chinese administration and the new political and economic team in the U.S. can play an important role in sharing their stories and frustration with U.S. companies. This is the time to help the FDI Chinese story in America to gain some momentum. We all should be part of this story.