The state of California is set to lead the United States in attracting foreign direct investment (FDI) from China over the next decade, buoyed by the state’s high-tech acumen, dynamic service sector and large Chinese-American population, according to a report launched globally on Thursday in Shanghai by the Asia Society.
Chinese outbound FDI is expected to grow in the range of US$1-2 trillion by 2020, with up to $400 billion going to the US, Daniel Rosen and Thilo Hanemann of the New York-based research firm Rhodium Group wrote in the report.
California has the potential to capture between $10 billion and $60 billion of that mercurial sum, the report said, but its success hinges on whether the Golden State can revamp investment promotion efforts to win over Chinese firms spoiled for choice and assuage America’s “national anxieties” about the nature of such investments.
In October, the US House Intelligence Committee said Chinese telecommunications firms Huawei and ZTE posed a security threat to America and that US telecommunications companies should not do business with them, but did not present any concrete evidence of wrongdoing on the part of the Chinese firms.
Rosen, head of the Rhodium Group and a visiting fellow at the Peterson International Institute for Economics, said “there are concerns about the policy environment” in the US. “The way some people are talking in Washington and Beijing…you’d think [the US] had gone completely for protectionism.”
Despite the rhetoric, Chinese direct investment in the US has surged since 2008, the report found, reaching an annual record of $6.3 billion in the first three quarters of this year. More importantly for the US, where high unemployment has hindered economic recovery, Chinese investment has created over 30,000 jobs, by the Rhodium Group’s estimates. Chinese direct investors currently have a presence in a minimum of 40 US states, the report said.
California has attracted 156 deals since 2000 – more than any other state – accounting for nearly 30 percent of all Chinese investment in America. Entrepreneurs from China’s prosperous coastal provinces largely funded the deals, investing heavily in information technology and software, leisure and entertainment and communication equipment.
Motivations to shift upstream or downstream on the value chain to increase to profits are driving China’s private firms to invest in advanced economies such as California’s, Rosen said.
“While China has a dominant position in global manufacturing, margins in that space are getting squeezed near to zero,” Rosen said. “It’s precisely in the tails of the production chain, in R&D and design, anticipating customer needs on the front end and managing customer relationships on the back end of the factory that margins are thick and defensible in the world today.”
When Chinese technology companies move up the value chain, they feel confident that they can sell in the international market, said Feng Deng, managing director of Beijing and San Mateo, California-based Northern Light Venture Capital, in his remarks to attendees at the Asia Society report’s global release in Shanghai.
Chinese firms in search of market access have looked to the developing world, where returns on capital can be lucrative, said Gary Rieschel, founder and managing partner of the venture capital firm Qingming Venture Partners.
Places like Africa are growing much faster than the US, he said, adding that America should “be realistic and understand where we really are the best.”
California ranks fifth overall in total investment value in the US behind New York, Texas, Illinois and Virginia, as it has yet to see major takeover deals.
“US states and cities are very interested in Chinese FDI to support their local economies,” said Brenda Foster, president of the American Chamber of Commerce in Shanghai, in remarks to the audience at the global release of the Asia Society report, adding that AmCham has hosted governors leading investment delegations from more than a dozen US states in the past year. California, she said, stands at “the forefront” of those efforts.
California announced in September that it will reopen its Shanghai trade office by the end of the year. The Bay Area Council, a San Francisco-based business group, aims to raise $1 million from the private sector to fund the office. Additionally, California governor Jerry Brown may visit Shanghai as part of a trade delegation next spring, according to media reports.
To ensure Chinese investment continues to pour into California, the state must also get its fiscal house in order, the report said. California’s State Budget Crisis Task Force estimates the state’s debt burden at between $167 billion and $335 billion. The Golden State ranks first in the US in foreclosures, led by the city of Stockton, located south of the capital Sacramento. When Stockton filed for Chapter 9 protection in June, it became the largest US city in history to declare bankruptcy.
“No one is going to invest in an economy that is struggling or going down the drain,” said Kenneth Petrilla, executive vice president at Wells Fargo Bank in San Francisco and head of its China Desk, during a panel discussion at the Shanghai launch event.
California faces fierce competition to attract Chinese investment from a wide swath of other US states. A group of sixty Chinese entrepreneurs and executives that visited the States in late September received a personal welcome from former President George W. Bush in his home state of Texas. Half of the group then traveled to Florida and Wisconsin while the other half made stops in California and Oregon.
In anticipation of the arriving Chinese delegation, Wisconsin put its key officials in charge of escorting the Chinese delegation through weeks of “sensitivity training” to ensure they were prepared for their guests, Rosen said. Adjustments included arranging tea breaks instead of coffee breaks and meals at Chinese restaurants.
“As great as a good Milwaukee hot dog is, not every Chinese delegate wants to have American food every meal or five straight days…and the customer is always right,” Rosen said.
Meanwhile, Rosen said California should take the lead in developing solutions to overcome the politicization of deals on unfounded national security grounds, adding that CNOOC’s failed bid for California-based oil producer Unocal in 2005 affected the subsequent flow of Chinese capital into the Golden State.
As a state long on the front line of Sino-American relations, if California gets Chinese investment right, it would bode well for overall ties between the world’s largest and second-largest economies, Rosen said.
“California is the canary in the coal mine. It’s been on the front line of U.S.-China relations since before it was a state,” he said.
Matthew Fulco is a freelance contributor based in Shanghai.