Chinese Investors Ham it Up

30 July 2014

On the Fourth of July, chances are that the sizzling hot dogs on a large number of barbecues came from a Chinese-owned company. That was because in late 2013, Smithfield Foods Inc., of Virginia, the world’s largest pork producer, was acquired by Shuanghui, its biggest counterpart in China, turning a quintessential American company into a Chinese subsidiary.

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At $7.1 billion ($4.72 billion, plus the assumption of Smithfield’s debt) it was, and so far remains, the largest Chinese takeover to date of a US company. Yet experts say the Chinese shopping spree for American firms is just gaining momentum.

The Chinese have not set their sights on an American apple pie company yet, but it may be a matter of time before they do. Chinese investment in the US totaled $14 billion in 2013, double the previous year, and according to the Rhodium Group of financial analysts, which keeps track of China’s activity in the US market, Chinese acquisitions reached $8 billion in the first quarter of 2014.

China has a long way to go to match British or French investment levels in the United States, but Chinese firms have only recently started to “re-export” their surplus capital. Initially, the Chinese were interested in raw materials for the country’s manufacturing sector, but now Chinese firms are all over the US map—more so than they are in any other country elsewhere in the world.

There are 236 Chinese companies operating in California alone, either as the new owners or partners of bought-out American firms, or as so-called green fields companies, which involves starting a new business and building new factories.

In California, the focus is on high-tech, energy, and real estate. The Chinese are looking for production venues free from the confusing constraints of China’s complex ongoing economic reform, for advanced technology that they can use at home, and for new foreign markets without having to siphon off goods from growing domestic demand. The giant state-owned enterprises remain the biggest hunters, but a remarkably large number of smaller, private Chinese firms are also among the corporate buyers.

As Chinese acquisitions have increased, so has the concern among US lawmakers over Beijing’s intentions. Congress has pushed for greater vigilance by the Committee on Foreign Investment in the United States (CFIUS), a somewhat shadowy government office charged with scrutinizing potential foreign buyers of US firms where there are security concerns.

The screening process calls for CFIUS to carry out a pre-sale investigation and then submit its findings to the president for a final decision if it thinks there may be security reasons for blocking a foreign sale. In fact, President Obama has exercised his veto only once, when a state-owned Chinese oil enterprise tried to take over an American oil company. But that hardly tells the story, because CFIUS officials meet privately with would-be foreign investors in advance of the formal hearings, and have been known to advise a firm to pull out if a refusal on security grounds seems probable.

But what constitutes a security risk? Defense contractors, computer companies, and energy firms are obvious targets for scrutiny. But the Smithfield takeover (which was not screened) raised protests from lawmakers who questioned the wisdom of allowing a major part of the US food supply chain to come under Chinese control, and Congress wants CFIUS to broaden its definition of acquisitions that require prior scrutiny.

At the same time the administration is using China’s investment interest in the American market as leverage to press Beijing to level the playing field for US investors in China. So far, the Chinese response has been to shorten (slightly) the list of areas of business out-of-bounds to foreign investors, and a bilateral investment treaty that has been in the works for years may be closer to an agreement.

American political reaction to the wave of Chinese takeovers has been ambivalent, weighing suspicion of China against the welcome reality that foreign investment has often meant jobs in towns and cities with serious economic problems. But as the US economic picture brightens and unemployment drops, Congress is likely to adopt a tougher approach, and Chinese investors are likely to find as many closed doors as open ones.