The
Chinese are coming! Just as the summer winds down,
announced Chinese acquisition in the United States
has reached US$7.8 billion, approaching its
all-time full-year record of $8.9 billion.
Significantly, Chinese FDI is pushing
westward. While Asia remains the overwhelming
favorite, the share of North America and Europe in
the total Chinese FDI portfolio grew from less
than 3% in 2008 to more than 13% just two years
later. The absolute value of that expansion is
equally impressive: The $9.54 billion total in
2010 is more than quadruple the level of two years
before.
Most recently, China National
Offshore Oil Corp (CNOOC) agreed
to pay $15.1 billion in
cash to acquire Canada's Nexen Inc, on the same
day that Sinopec, another Chinese oil company,
agreed to acquire a 49% stake in UK North Sea
assets owned by Talisman Energy (another Canadian
enterprise) for $1.5 billion. Regardless of
whether these two deals are ultimately approved -
the process continues at this writing - the sheer
volume and potential of Chinese foreign direct
investment (FDI) will have a profound impact on
the global economy, providing both enormous
business potential and new challenges.
The
world, particularly the West (which is becoming
increasingly attractive to Chinese investors)
should welcome this trend, but governments must
also develop strategies to take full advantage of
the economic opportunities it presents.
The July 23 deals are part of China's
growing interest in mergers and acquisitions
(M&A), which has assumed a steadily expanding
share of China's recent FDI. M&A constituted
some 46% of Chinese FDI in 2011, up from 18% in
2003. Large state-owned enterprises (SOEs)
continue to be the main driver of Chinese outward
FDI, making up more than two-thirds of such deals
in 2010. The average value of M&A deals is
usually larger than greenfield projects: The 143
M&A deals in 2011 have almost the same value
as the 918 greenfield projects (the increasing use
of M&A by Chinese investors also reflects the
growing sizes of Chinese FDI projects).
The westward shift of investment direction
is natural after three decades of fast growth that
has established China as No 2 among global
economies. The growth has primarily been dependent
on labor and resource-intensive industries. For
the Chinese economy to continue to advance, it has
to reform its giant industrial machine toward
higher value-added production. The fact that
Chinese outward FDI is moving toward matured
markets such as the US and Europe is a reflection
of this fundamental transition in its economic
development. This shift will present opportunities
for China to access sophisticated technology and
management, mature its large domestic consumer
market, and assure a stable supply of resources,
as well as skilled labor.
Experts debate
whether specific FDI projects are independent,
profit-driven commercial decisions or driven by
the government as part of its national development
strategy. Whatever the conclusion, the choices of
industries fit the strategic needs of China's
long-term economic development. There is growing
interests in China to acquire large stakes in
companies in the West that have relatively safe
and established energy resources, advanced
technology that can supply much needed research
and development for Chinese industry,
manufacturers with good market bases and potential
in the West and in China, or banks that provide a
pathway to Western financial markets.
The
impending takeover of Nexen comes after a $19
billion bid by the same company to acquire the US
oil company Unocal in 2005; that bid was blocked
by strong political objections based on
controversial national security concerns from the
US Congress. It comes at a time when Canadian
energy companies are trying to reduce dependence
on the US market by building new pipelines toward
Asia. The takeover of Nexen will provide the
Chinese company with access to sophisticated
technologies for oil/gas production, including
Nexen's oil-sands, shale-gas, and deep-water
leases in North America. It will also provide the
Chinese company significant assets in the Gulf of
Mexico. CNOOC made the offer after careful
preparation to satisfy the needs and political
demands of Canadian authorities to avoid an
experience similar that of the Unocal acquisition.
If the Nexen deal is completed, it will be
another example of a company that has met with
strong political resistance in the United States
successfully investing in projects with US allies
and close partners. Many people believe that the
Nexen deal enables CNOOC to park the same money
from its unsuccessful bid to acquire Unocal in
another country.
Similarly, Chinese
telecommunication giant Huawei has been blocked
from making acquisitions of US-based technology
companies citing national security concerns. But
it has had a smooth ride in Europe, setting up six
R&D centers and recently acquiring the UK's
world-leading photonics research laboratory.
Unlike the US, the European Union does not have
regulations that distinguish foreign investors
from domestic ones.
Without judging
whether national-security concerns are credible in
each case, a fundamental question remains: If such
concerns about Chinese FDI are credible, then
should the US be worried about breaches by Chinese
investments in allies and partners? This is not to
say that the US should follow suit when others
make mistakes, but it should rethink its current
strategy. A detailed and forthcoming
national-security strategy regarding Chinese
direct investment that also takes into account
critical allies' activity will be key to
successfully guarding US security interests and
would welcome Chinese investors with clear
guidance. However, if it's not about national
security but other vested economic interests, then
the US is hurting itself by turning away
investment capital.
It is natural that the
world's two largest economies are not just
important trade partners, but also investment
partners. It isn't just wise but necessary for the
US to take full advantage of westward Chinese FDI
with appropriate strategic caution. Thus the US
must resist political pressure to oppose Chinese
investment based on protectionist commercial
interests; national-security-related concerns over
Chinese FDI should not be treated in isolation. In
other words, national-security concerns should not
become a political tool to justify protectionist
measures.
At the same time, there is a
need to communicate and coordinate valid concerns
to US allies and close partners so that US efforts
are not compromised elsewhere. These concerns
could be addressed through the numerous existing
channels between the US and key ally countries,
such as the communication lines with the Defense
Department, congressional exchanges, and Treasury.
The westward trend of Chinese FDI will
continue; the West must adapt to it. The Nexen
takeover will be only one of many large-scale
Chinese FDI projects to come. Some investors
predict an additional $800 billion in Chinese FDI
from 2011 to 2016, if current growth rates and
government policy hold steady.
Given
growing uncertainty in global financial markets
and increasing risks in sovereign bond markets
such as the euro zone, the need for direct
investment by China will likely increase: Since
January 2008, Chinese firms have disclosed 1,414
overseas acquisitions with a value of more than
$235 billion. For the US to seize this
opportunity, a number of other things must also be
done: It needs to promote further its open market,
good investment environment, and business
opportunities. This is particularly necessary to
counter the negative image created by a few failed
cases that Chinese FDI is not welcomed in the US.
But a better definition of national security for
US companies and potential Chinese investors will
be a critical step toward a comprehensive US
approach to Chinese FDI.
Ting Xu
is a Worldwide Support for Development (WSD) -
Handa Haruhisa Resident Fellow at the Pacific
Forum CSIS and senior project manager at
Bertelsmann Foundation North America
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