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As the U.S. and China continue to battle their way to a trade deal, some old fears are bubbling up again that China will flood into the U.S. market, buying up U.S. assets in a frenzied fire sale.
A Gallup poll in February showed that nearly 90% of Americans consider China's economic power a critical or important threat to U.S. interests. The Trump administration has granted expanded power to the U.S. regulatory review of foreign investments, conducted by an intergovernmental body known as CFIUS, in the apparent belief that it is the last defense against the Chinese cascading in, binging on U.S. assets and stealing U.S. secrets.
But, having worked for years with Chinese companies navigating the American legal and regulatory landscape, we have come to see that those fears are overblown. There are natural brakes on both sides to prevent a tsunami of overly exuberant Chinese investment in the U.S.
Here are some of them:
China is not the second richest country in the world. While China has made impressive gains since its reform and opening in the early 1980s, it still is a developing country. It ranks 67th in the world for GDP per capita, which puts it between Mexico and Turkey. China's 2018 GDP per capita amounts only to 15.3% of that of the United States. It simply cannot run roughshod over us.
China faces the same challenges as any developing country, struggling to find a long-term, sustainable growth path. With last year's economic growth rate hitting a modern low at 6.6%, the Chinese government has gone back and forth between austerity to address debt buildup and stimuli such as value-added tax cuts to boost market confidence.
The intense anxiety over China's rising is reminiscent of U.S. fear of Japan's economic juggernaut. The 1980s witnessed Japanese money directed toward the U.S., acquiring high-profile assets such as Rockefeller Center in midtown Manhattan. Rhetoric about "containing" Japan gripped the U.S. until the real estate bubble burst, dragging Japan into a long economic quagmire from which it only recently emerged.
The same risk holds true for China. Chinese policy-makers have effectively walked the tightrope so far, but saying China is the second largest economy is not the same as saying it is the second strongest.
Chinese regulators have introduced meaningful and impactful restrictions on outbound investments. It perhaps is hard for U.S. observers to believe that the Chinese are equally concerned about their outbound investments and capital outflows. But they are. In 2017 and 2018, for example, several Chinese government agencies and departments codified new rules imposing approval and reporting requirements over Chinese outbound investments.
Under those codified rules, the Chinese classify outbound investment into three categories: encouraged, restricted and prohibited. Investments in real property, entertainment, private equity, sports clubs, etc. fall into the restricted category, while investments in gambling, sex industry, core military technology or those contrary to China's national security interests are flatly prohibited. Only those related to oil and mining exploration, agriculture, fishing, or research and development are encouraged.
Chinese outbound investing entities also are subject to comprehensive disclosure requirements. They must provide an equity structure chart showing the ultimate controller of the transaction, as well as investment agreements, details of business operations and transaction background, financing plans, risk analysis and management, among other information.
The new Chinese regulatory environment has affected the sectors and regions in which Chinese investments are flowing and the willingness to invest overseas. According to Xinhuanet, the volumes of overseas property investment alone dropped 63% in 2018, hitting a four-year-low of $15.7 billion. The Ministry of Commerce reported in March that Chinese outbound investment in January and February was $15.66 billion, a 6.9% drop from last year. For Chinese outbound investments in the U.S., the number fell from a high of $45.63 billion in 2016 to $5 billion in 2018, a drop of 83 percent.
China has, as a matter of geopolitical strategy, pivoted away from the U.S. China is focused on its Belt and Road Initiative, known as BRI, its investment spending program spread over 60 countries along the land and maritime Silk Road — the two ancient trade routes that connect Eurasia, Africa and Oceania — interweaving China's economic and geopolitical agenda. The Chinese are using their soft power to exert influence with currencies of culture, foreign policies and political values over neighboring countries. While the West is moving away from soft power, either by limiting immigration or reducing funding to foreign countries, the Chinese see the advantages of it. China is expected to spend more than $1 trillion by 2027.
This means two things for Chinese outbound investments in the U.S. For one, outbound investments that further the strategic agenda of the BRI fall into the category of "encouraged outbound investments" under the codified rules, incentivizing Chinese investors – especially institutional investors – to invest in the BRI countries. For another, BRI cannot go wrong. To make sure of this, mammoth resources and cash will be diverted from other outbound destinations — including the U.S. — to fund BRI projects and address any problems resulting from the low-interest high-risk loans, the inherent economic and political vulnerability of the BRI countries, among others.
This is not to say that Chinese businesses have given up on the U.S. They have not. They still want to invest in the U.S. But Chinese investments in the U.S. are not poisoned chalices, nor are they part of the outbound campaign of peddling Chinese finances into the U.S. markets. If anything, the new regulations and guidelines adopted by the Chinese add heft to a more transparent investment regime, bringing rationality and maturity to Chinese outbound investing.
Americans can take advantage. Instead of blindly following the mainstream clamor about the "threat" of Chinese investors, U.S. businesses should tune out the noise and focus on doing meaningful deals with them.
Lanier Saperstein is a partner and Helen Jiang is an associate at the law firm Dorsey & Whitney LLP. Mr. Saperstein serves as co-chair of Dorsey's award-winning U.S. China Practice Group, which works with its Chinese business clients on deals, litigation and regulatory matters in the U.S.