US panel’s call for ban ignores benefits of Chinese M&As

A Congressional drive to limit Chinese investment in the US that was energized by Donald Trump’s election as president, has been pushed into higher gear by a legislative advisory panel’s recommendation that China’s state-owned enterprises (SOEs) be banned from acquiring US companies.

The US-China Economic and Security Review Commission urged in a November 16 annual report that “Congress amend the statute authorizing the Committee on Foreign Investment in the United States to bar Chinese state-owned enterprises from acquiring or otherwise gaining effective control of US companies.” The commission’s rationale is that such M&As allow SOEs to tap US assets and project Chinese economic power.

The recommendation was one of 20 made to Congress in the panel’s analysis, which included an assessment of Chinese military, geopolitical, and intelligence threats to the US.

But the scathing report avoids mentioning what some analysts say are the substantial benefits to the American economy from investment by China’s SOEs and private sector companies.

“There’s a difference between fact and fiction,” said Scott B. MacDonald, an economist and risk consultant specializing in Asia. “There’s a perception in some quarters that the Chinese are taking over US companies to steal secrets … but the fact is that Chinese investment in the US has beneficial impacts.”

“China’s investment benefits the US in terms of job creation, capital, technology transfers and R&D,” said Ming Jer-Chen a professor at the Darden School of Business at the University of Virginia.

According to one US researcher, investment from China to the US has weighed in at more than US$64 billion over the last 25 years, far higher than previous estimates.

The US panel’s advice marks Washington’s first overt move to limit Chinese acquisitions for “diminishing” the US industrial base. Prior attempts to ban Chinese M&As on economic grounds have taken the form of legislative letter-writing campaigns to various US agencies reviewing foreign acquisitions. The government, until now, has mainly blocked Chinese purchases of US companies if they posed direct threats to US defense or strategic interests.

The commission also warned Congress in its report that large-scale outsourcing of US manufacturing to China undercuts US military supply chains and the ability to produce advanced military systems and equipment. It also noted the dangers of Chinese buyers acquiring US technology companies.

Some experts expect the campaign to curb Chinese investment in the US to intensify now that Trump, who took a critical campaign stance toward China on trade and currency issues, is the president-elect.

The commission’s recommendation might also lay the groundwork for future legislation prohibiting Chinese SOEs from acquiring US firms, though its advice isn’t legally binding and its report doesn’t address the separate issue of US acquisitions by private Chinese firms.

100,000 US jobs created

While some US fears about Chinese M&As appear justified, a study by Rhodium, a New York-based advisory that tracks Chinese investment in the US paints a more upbeat picture of such Chinese inflows.

Official US tallies for total Chinese FDI range from US$15 billion to US$21 billion, while Chinese estimates place the figure at US$41 billion, more than twice US estimates. The difference is attributable to factors such as timelines, tax accounting factors or if money was funneled through third parties or via Hong Kong.

But the November 2016 report by Rhodium and the National Committee on US-China Relations estimates that when Chinese investment in the US is tracked for 25 years, from 1990 to 2015, Chinese companies made more than 1,200 individual transactions in the US with a combined value of US$64 billion. The cumulative inflow from China is estimated to have created over 100,000 US jobs.

The Rhodium report, titled Two-Way Street: 25 Years of US-China Direct Investment also found that despite red flags on SOEs, Chinese investment in the US is now increasingly driven by private Chinese companies.

An average of 77% of all Chinese M&As in the US over the past three years are said to have come from the private sector. The Chinese investor mix is also said to be moving from big Chinese multinationals to include private equity firms, venture capitalists and other financial investors.

Rhodium adds that Chinese companies are expanding their presence from US coastal regions and are moving operations to many inland US states, benefiting the economies in these regions.

One example is Chinese glassmaker Fuyao which was touted in a November 3 article in the Wall Street Journal for opening an auto-parts factory in the Rust Belt town of Moraine, Ohio. Others are Beijing-based BWI Group’s brake and suspension system plants in Dayton, Ohio and Brighton, Michigan and Shenzhen-based BYD Auto’s branch in Arlington Heights, Ill.

Rhodium estimated earlier this year that Chinese investment in the US is set to reach a record level of US$20 to US$30 billion in 2016.

Doug Tsuruoka is the Asia Times Editor-at-Large