Even though the U.S. Treasury has temporarily withdrawn its threat to cite China as a currency manipulator, and the latest currency row between Washington and Beijing has cooled down, the U.S.-Chinese economic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.
This is part of China’s concerted “going out” policy, articulated by Chinese Premier Wen Jiabao in July 2009, to encourage investments and acquisitions abroad. Chinese authorities are tired of buying government bonds from the United States and seek to acquire more productive assets and to diversify their holdings. An estimated 50 to 60 percent of China’s accumulated foreign exchange reserves, which stood at $2.4 trillion at the end of March 2010, are invested in low-yield U.S. Treasury and other government bonds. The investment portfolio held by all Chinese interests, including government-sponsored and private corporations, suggests a conservative bias toward government bonds, with only six percent of their total portfolio of U.S. securities allocated to equities (compared to 16 percent for Japan and 35 percent for the United Kingdom). Although the equities allocation remains modest, it is expanding, having grown from 1.5 percent in 2000 to 6 percent today.
China’s sovereign wealth fund, the China Investment Corporation, also appears poised to increase its purchases of U.S. equities. CIC was established in 2007 to channel a portion of China’s foreign exchange reserves toward higher-yielding investments. Today, its assets have grown to about $300 billion, but so far, only half of the $110 billion reportedly allocated to overseas investments has been spent. Another government-sponsored investment vehicle, China’s National Council for Social Security Fund, is also poised to accelerate its equity investments in the United States. Its chairman, Dai Xianglong, recently announced that the fund would begin investing more in U.S. and European markets as part of a plan to triple the amount devoted to international investments.
China’s rise in U.S. investments is taking place even before the anticipated resumption of the renminbi revaluation process, which will make U.S. assets cheaper for Chinese buyers. To be sure, Beijing is most likely to resume the process using the same cautious, incremental approach it adopted when it last allowed its currency to be revalued, between July 2005 and July 2008. As a result, revaluation will probably raise the value of the currency very slowly; capital markets are currently predicting only a three percent appreciation over one year. Still, the revaluation will be tangible enough to spur more Chinese purchases of dollar-priced assets over time.
A perceptible spike in Chinese acquisitions of U.S. assets will likely trigger a protectionist reaction in Washington, where congressional leaders are arguably even more hostile toward Chinese business interests than they were during the uproar over the CNOOC-Unocal bid in 2005. There is a widespread perception among U.S. politicians that China is slighting U.S. business interests. At the top of the list of grievances are Beijing’s rejection of Coca-Cola’s offer for China Huiyuan Juice Group in 2009 and its treatment of Google earlier this year. During the global financial crisis, when almost any kind of capital inflow became politically acceptable, Chinese investments in the United States became less controversial. But this receptiveness could quickly end, as economic normalcy returns and China’s ramp-up in equity purchases gains broader recognition.
In truth, Chinese investments to date have not posed any significant risk to U.S. national security. The greater risk lies in overreacting. Perhaps still shaken by the Unocal debacle, Chinese corporations have largely avoided investing in natural resources in the United States, even though this has been the top priority for China’s overseas acquisition strategy in the recent past. There are some exceptions, including CIC’s acquisition of a 15 percent stake in AES, a U.S.-based electrical power company, in November 2009. But by and large, China has steered clear of U.S. natural resource companies to avoid controversy.
More broadly, Chinese firms’ low-key approach toward U.S. investments stands in contrast to the bolder style of Japanese firms in the second half of the 1980s. Unlike Japanese firms, which famously bought Rockefeller Center and the Pebble Beach golf resort, Chinese firms have eschewed trophy assets, preferring more discreet acquisitions. By the same token, CIC has gone out of its way to portray its intentions as benign. In its initial landmark investment in Blackstone, a U.S. private equity firm, CIC was willing to forego voting rights, investing $3 billion in non-voting shares. This suggests a concern for returns rather than influence. A recent Securities and Exchange Commission filing disclosing CIC’s holdings in U.S. companies revealed the fund’s focus on relatively small stakes and reinforced the notion that the fund is not attempting to gain control or influence through its U.S. investments. Indeed, CIC President Gao Xiqing has publicly declared that the fund will not take stakes of more than 20 percent in any one company.