China Goes to Wall Street

Beijing’s Evolving U.S. Investment Strategy

Even though the U.S. Treasury has temporarily withdrawn its threat to cite China as a currency manipulator, and the latest currency row between Washington and Beijing has cooled down, the U.S.-Chinese economic relationship is far from settled and predictable. The most intractable flash point may stem from a quiet trend that has not yet made headlines: Chinese companies and government-sponsored investment vehicles are increasingly purchasing U.S. assets. For all the concerns about China’s large holdings of U.S. Treasury bills, its investments in American companies could be met with even greater sensitivity.

Chinese companies have shied away from high-profile acquisitions in the United States ever since 2005, when political controversy scuttled the Chinese state-owned oil company CNOOC’s attempt to acquire the U.S. oil company Unocal. A Chinese takeover of U.S. oil assets was seen as cutting too close to American security interests by various members of Congress, who publicly opposed the deal and led calls for a broad inquiry. Over the past several years, the total amount of Chinese equity investments in U.S. companies has been low enough to avoid causing significant concern.

Now, this may be changing. According to the U.S. Treasury, China’s U.S. equity portfolio holdings increased from $1.4 billion in 2000 to $4 billion in 2006, and subsequently swelled to $93 billion in early 2010. The Treasury data capture purchases of U.S. equities by country of origin, not by the nationality of the ultimate purchaser, but the trend is clear, with portfolio investments and mergers-and-acquisitions transactions pointing in the same direction. According to Dealogic, a provider of financial data, Chinese acquisitions of equity stakes in U.S. companies reached $3.9 billion in 2009, climbing past the minimal levels seen a few years ago. And in 2009, Chinese acquisitions of U.S. equity stakes surpassed U.S. acquisitions of Chinese equity stakes for the first time.

China’s ramp-up in its U.S. investments is reminiscent of Japan’s during the 1980s. Although Chinese equity holdings may not be as ubiquitous as Japan’s were then -- China accounts for 3.5 percent of total foreign holdings today, versus 10 percent for Japan in 1989 -- the steep upward slope of China’s purchases suggests that it might get there soon.

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