More than two decades ago, Japan sported the most dynamic economy in the developed world.
The country's Nikkei stock market index was soaring to new heights, and real estate prices were skyrocketing. Flush with cash after a multi-decade spree of trade surpluses, Japanese investors started to seek assets elsewhere, and some of their biggest moves took place here in the U.S.
At the time, Japan Inc.'s move to snap up the highly prized Pebble Beach golf course in California and the Rockefeller Center complex in New York City led to lots of hand-wringing. Suggestions that our most beloved assets were falling into foreign hands led to a widespread economic anxiety that bordered on xenophobia.
All the worries ended up being for naught, however. Within a decade, those assets would be sold off -- at losses ranging from $400 million to $1 billion -- and fears of a "foreign invasion" subsided.
Fast-forward to 2012, and China is the new bogeyman. Chinese companies have been heavily investing in Africa, Latin America and the rest of Asia for the last half decade, and now they're setting their sights on U.S. assets.
Consider that Chinese companies have invested nearly $21 billion in U.S. companies over the past dozen years, but fully 17% of those deals (or $3.6 billion) came in just the first-half of 2012 alone, according to research firm Rhodium Group. That's not far from the full-year record of $5.8 billion set in 2010.
That record will be surpassed -- by a big margin -- if a pending deal goes through by China's Dalian Wanda to acquire movie theater chain AMC for $2.6 billion. The purchase is looking more and more likely, given reports that Wanda announced it had received regulatory approval for the purchase. A report in the Los Angeles Times said that the deal is expected to be closed at the end of August.
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Big Investments, No Big Deal?
Is this additional investment cause for concern? After all, a number of African countries have begun to regret major infrastructure development deals with China, citing concerns that these deals exploit vast troves of mineral resources, but fail to provide the value-added processing of these resources that help an economy grow.
But here in the United States, we should have no such concern. Chinese investments are more focused on mid-sized manufacturers or other industrial processors such as chemical manufacturers. For example, from 2011-2012, there have been 17 deals involving the "fossil fuels" and "chemicals" industry, which have totaled nearly $4 billion in value. These firms usually provide solid jobs, and those jobs are likely staying put.
If you live in California, you're probably aware of a Chinese-owned firm that operates locally. Of the 591 deals tallied by Rhodium Group since 2000, 27% of them took place in California. (In fact, of all the American-based businesses in which Chinese firms are investing, roughly half of them are in California, Texas, New York or Virginia.)
Notably, private companies account for 73% of all of those deals. The other 27%, which were made by the Chinese government, account for 63% of the dollar volume of the deals.
Why The Chinese Are Buying In
Chinese companies are targeting U.S. firms with specific goals in mind, including:
- Gaining an understanding of advanced manufacturing techniques
- Procuring a supply of intermediate goods used in the manufacture of finished goods (e.g., auto parts that go into Chinese cars and trucks)
- Acquiring businesses that have historically produced solid cash flow, bringing a tangible ongoing return on their investment
- Avoiding tariffs in industries that are often the subject of trade disputes
Think these motives are suspect? You shouldn't. It's precisely what global firms do every day as they aim to spread their resources across various economies. And you may be surprised to know that U.S. firms own a lot more assets in China than Chinese firms do in the United States. According to the U.S.-China Business Council, U.S. firms have invested at least $90 billion in China in each of the past four years. That's more in any given year than China has invested in the United States in the last dozen years -- combined.
Of course, investments in China often come with serious restrictions. In certain sectors, the Chinese government insists that foreign owners control less than 50% of the voting stock in a domestic company, and they are also required to share their technology with local partners. For example, global automakers such as GM (NYSE: GM) and Volkswagen have provided so much expertise to their Chinese manufacturing partners, that the Chinese auto industry may eventually be able to sell vehicles in the most demanding markets.
But this shouldn't be cause for alarm. That was precisely what happened in Japan and then South Korea. Cars made in those countries were uninspiring at the start of their economic development, but eventually became world-beaters. That spelled trouble for firms like Ford (NYSE: F), Chrysler and GM, but a range of other U.S. industries eventually benefited from the economic growth in Japan and South Korea. These countries initially needed a leg up to develop globally competitive economies, but their citizens now account for some of the most free-spending consumers of U.S.-branded products. From McDonald's Corp. (NYSE: MCD) to Nike Inc. (NYSE: NKE) to Microsoft Corp. (Nasdaq: MSFT), you hear about these markets on virtually every quarterly conference call these companies hold.
And down the road, you'll be hearing a lot more about Chinese markets for our goods. It's still a tough sell, but as China shifts away from being an export-led economy to a domestic consumption economy, this economy has the potential to become the United States' greatest export success story.
Action to Take --> Chinese companies are starting to snap up U.S. assets in a big way. Top real estate markets such as New York, Los Angeles and San Francisco are experiencing a rising tide of million-dollar homes being sold to Chinese citizens. These folks are now moving beyond real estate and their cash is providing a badly needed injection of liquidity at a time when our economic activity is diminished. As was the case with the Japanese buying spree of the late 1980s and early 1990s, this is simply a logical step in the evolution of China's economy onto the global stage.
David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of MSFT in one or more if its “real money” portfolios.
The article was orginally published at StreetAuthority.com
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