Forget the Headlines: Chinese Buying Big in US

Source: China Construction America

China Construction of America has successfully bid for state-level and municipal projects in the United States, such as the $407 million Alexander Hamilton Bridge rehabilitation, seen here.

News that a Chinese firm plans to acquire one of the largest food companies in the United States came as surprise to many market-watchers, but Chinese investment in the U.S. is at an all-time high—and is only likely to increase.

Prior to the proposed deal between Smithfield Foods and acquirer Shanghui International, the single largest Chinese investment in America had been more mundane than the energy and resource companies that China gets headlines for buying: It was a movie theaters. But to a large extent, that type of acquisition explains the broader story about China's strategy when it comes to U.S. investment.

AMC Theaters, previously owned by a group of U.S. private equity firms, is now a division of Dalian Wanda of China—a huge entertainment conglomerate that spent $2.6 billion in 2012 on the theater chain. With the purchase, Wanda controls more ticket sales in the world than any other company.

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It's no accident that the largest U.S. purchase so far is for a company as non-controversial as AMC. Chinese businesses—many of them government-owned—have repeatedly been rebuffed by the U.S. government when trying to buy American firms that control natural resources or advanced technology.

It is either a testament to the tenacity of the Chinese, or simply a reflection of the gobs of money they have, that despite all the negative headlines, Chinese investment in the U.S. hit an all-time record in 2012: $6.5 billion. It will likely surpass that level in 2013, according to Rhodium Group, which does detailed tracking of Chinese investment. The Heritage Foundation, which tracks Chinese investment, says that the U.S. was the single biggest recipient of Chinese overseas investment last year, eclipsing Australia for the first time.

"We are in the midst of a structural growth story that will transform the China-U.S. investment relationship from a one-way street into a two-way street," says Thilo Hanemann of Rhodium.

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CNBC profiled three Chinese-owned companies in the U.S. in order to explore what kind of deals and investments are getting done, and the motivations behind them.

AMC Theaters, International Vitamin Corporation, and China Construction of America represent a cross-section of Chinese-owned firms. Two are quite large, while one is comparatively small. Two are private, while one is owned by the Chinese government. Two are new to the U.S., while one has been here for 28 years.

Regardless, the goal of all the three CEOs is the same: growth.

Jianlin Wang, chairman of Dalian Wanda, which bought AMC, wants his company to reach $100 billion in revenue by 2020, up from the current level of $30 billion. While his home market China is the fastest growing movie market in the world, he'll still need overseas acquisitions to achieve his goal.

"The acquisition of AMC is just the start," says Wang, and "probably before the end of the year we may complete one or two more deals." He says he expects to spend another $7 billion in the U.S. by the end of this decade.

While there may be critics at the federal level, the mood is just the opposite at the state level. New Jersey's lieutenant governor has visited IVC's headquarters, and has asked CEO Dai to speak to other visiting Chinese executives to convince them to invest in NJ as well.

Dai says he tells those visiting executives that investing in the U.S. is a no-brainer compared with other parts of the world that may be afflicted by instability, wars or corruption. In the United States, he tells them, "you just focus on what you are doing and your hard work will be rewarded. You don't have to worry about other things like connections, or relationships."

Chairman Wang says that while members of Congress may be worried, officials at the state, city and municipal level "are quite welcome to Chinese investment, because such investment can create job opportunities and boost economic development."

To be sure, even though Chinese investment is at a record level, it is still relatively small compared to the size of the U.S. economy. According to the Heritage Foundation, total Chinese investment in the U.S. since 2005 stands at $54 billion, compared with an overall wealth stock in the U.S. of $60 trillion.

Wang tells CNBC that he plans acquisitions in nearly every part of the globe. By doing so, he thinks he can garner better profit-sharing agreements with Hollywood movie studios and hence higher profitability.

International Vitamin Corporation, of Freehold, N.J., came into being after a Chinese company bought the vitamin assets of Inverness Medical from private equity in 2010. CEO Steven Dai says the investors (he's one of them) have pumped "upwards of hundred millions of dollars into the company," since then—improving its IT backbone, expanding warehouse capacity, and increasing the number of employees from 280 to 400, all of them in the U.S.

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Dai, the only Chinese employee, says buying an American company made the most sense because the U.S. has a highly developed, multi-billion dollar, nutritional market "which constantly grows every year."

Of the three companies that spoke to CNBC, the one with the longest history in the U.S. is China Construction of America, a wholly owned subsidiary of China State Construction Engineering Corporation (CSCEC) that had $500 million in revenue in 2012. (Parent company CSCEC had revenue of $92 billion last year.) Although publicly traded in Shanghai, CSCEC shares are majority owned by the Chinese government, making China Construction of America part of what's known as a State-Owned Enterprise, or SOE.

China Construction set up shop here nearly 30 years ago in 1985 because the U.S. was the world's largest construction market at the time. Why are they still doing business here, when China is now larger and growing faster? Geographic diversification, CEO Ning Yuan tells CNBC, in case the home market falters.

The company has been successful at bidding for state-level and municipal projects such as public schools in South Carolina and New York State transportation projects such as the $407 million Alexander Hamilton bridge rehabilitation.

But Yuan expressed frustration at not being able to qualify for larger federal projects—what are known as "P3s"—Public Private Partnerships. The U.S. Department of Transportation requires companies to become pre-qualified before bidding on P3s. Despite numerous attempts, Yuan says they've never been prequalified. "I think that's happened not only to a Chinese company but also to some other foreign companies," he said. "I would say that it is a little bit political."

That may be true. Firms owned by the Chinese government are perceived as having unfair advantages, such as access to cheaper financing from the Chinese banks, which are also government-owned. Yuan rejects the notion, saying Chinese banks charge them market rates that are comparable to any other multinational bank: "I know from my heart we don't have any advantage."

The Heritage Foundation marks the starting point of China's overseas acquisitions with the 2005 purchase of IBM's computer business by Lenovo for $1.74 billion. Not only was it a transformational transaction for IBM, it heralded the arrival of the Chinese investor.

But 2005 also marks the year of the highest-profile rejection of a Chinese purchase—when CNOOC (China National Offshore Oil Company) tried to purchase Unocal of California for $18.5 billion. The mere announcement of the deal created so much Congressional controversy that Unocal accepted a lower bid rather than risk U.S. government rejection of the CNOOC offer.

In retrospect, it too was a seminal moment in the history of Chinese-U.S. mergers and acquisitions. China has never again attempted such a large energy acquisition in the U.S. even though it has done numerous major energy deals elsewhere in the world. Two months ago, CNOOC purchased Canada's Nexen for $15.1 billion, but had to forfeit takeover of Nexen's Gulf of Mexico oilfields under U.S. terms for the deal.

In the U.S., Chinese energy investments have been limited to minority stakes and joint ventures, including Sinopec's $2.2 billion investment last year in some of Devon Energy's venture plays, and a $1 billion investment for part ownership of some of Chesapeake's shale gas properties as well.

In 2012 alone, President Obama rejected a Chinese purchase of four Oregon wind farms due to their proximity to a U.S. naval drone-testing site. Additionally, a congressional report last year eviscerated two Chinese telecom companies eager to do business in the United States, Huawei & ZTE; members of Congress came very close to accusing the two firms of spying on behalf of the Chinese government.

The next key moment comes when AIG, the insurance company, finds out if it will be allowed to sell most of its aircraft leasing arm to a Chinese consortium for $4.8 billion. The deal was announced in December, and if finalized, would eclipse the AMC theater purchase.

But the Committee on Foreign Investment in the United States, or CIFIUS, the government agency that vets foreign deals for security concerns, has yet to sign off on it.

—By CNBC's Michelle Caruso-Cabrera. Follow her on Twitter: @MCaruso_Cabrera