(This
article is adapted from comments delivered at the recent Sino-US
Investment Summit in New York.)
By
Keith W. Rabin
NEW YORK (KWR) -- Two years ago there was a lot of anxiety in Asia about
the emergence of China. Neighboring countries were worried that China’s
rise would diminish their national competitiveness. During one meeting
in Tokyo I was asked by a senior official whether people in the U.S.
were also concerned. At the time people here did not seem overly
worried and I answered I did not really think so. He was surprised
and asked why not. I answered the U.S. had already faced its China
about twenty years ago and it was called Japan.
We both laughed, however, two years later it seems I was wrong. I go to a
lot of conferences, though most are internationally-focused and don’t
really reflect public opinion. Therefore, when I attended a retail investment
conference a few months ago, I was amazed when person after person got up
during a Q&A session to complain with great passion about job losses
and the threat they believed that China represented. In the mid-1990s, KWR
International used to do a lot of trade issue work helping Asian government
and industry associations to communicate their perspective on autos, semiconductors
and steel. This reflected the substantial concern that existed in the U.S.
at that time over our rising trade deficit and the loss of manufacturing
jobs overseas.
As U.S. economic performance improved during the latter half of the decade,
the environment began to change. Asian nations, particularly after the onset
of the Asian financial crisis, were no longer seen to be a serious threat.
Investor and corporate attention shifted toward the opportunities presented
by the dotcom and U.S. productivity “miracle”, and trade relations
became less confrontational. Now, however, we are starting to see similar
rhetoric and pressures being directed toward China. While it is not clear
how this will turn out -- with the run-up to the presidential election before
us, it would not be surprising to see things continue to heat up -- at least
over the coming year.
Interestingly, the Asian countries now seem to have made their peace with
China. The anxiety that could be sensed two years ago seems to have transformed
itself into a recognition of China’s potential. While many in the U.S.
complain about an unfair trading environment, Japanese exports to China surged
27.8 percent last October. When trade with Hong Kong is figured in, Japan
registered a $778 million surplus for the month, accounting for 63 percent
of Japan's export growth in October. In comparison, Japanese exports to the
United States fell by 6.2 percent -- their 10th consecutive monthly decrease.
Korea has also begun to more fully embrace China. This year Korean trade
with China surpassed that with the U.S., and China is now its largest trading
partner.
What does this mean in terms of China-related investment opportunities for
U.S. companies and investors? The main point is China is here to stay and
Americans are going to have to more fully recognize, understand and embrace
China if they are to benefit from its emergence as an economic power.
In a
recent KWR International Advisor article Marc
Faber notes statistics that China now ranks as the world’s
largest producer of cereals, meat, fruits, vegetables,
rice, zinc, tin, and cotton. It is the world’s
second-largest producer of wheat, coarse grains, tea,
lead, raw wool, major oil seeds, and coal, the world
third-largest producer of aluminum and energy (measured
in million tons of coal equivalent), and ranks between
fourth and sixth in the production of sugar, copper,
precious metals, and rubber. It is also the world’s
largest manufacturer of textiles, garments, footwear,
steel, refrigerators, TVs, radios, toys, office products
and motorcycles, just to mention a few of many product
lines. He goes on to note that Asia, including China,
Japan, South and South East Asian countries have a combined
PPP-adjusted GDP of $14 trillion -- 50% larger than the
US’s PPP-adjusted GDP of $9.6 trillion.
Without going into details about specific China-related companies, ADRS and
mutual funds, it should be noted there are many interesting opportunities
that allow U.S. and other foreign investors – both institutional and
retail – to take advantage of growth in these markets. The same is
true for companies seeking to establish new sourcing and manufacturing platforms
as well as new consumer and industrial markets.
Put another way, Asia, with China at the center,
now has a combined population of 3.6 billion. It also
has more favorable demographics than the U.S. and Europe
and one of, if not the most, dynamic trading environments
in the world. At the same time, Asia’s combined
equity weighting now totals about 3.4% of world market
capitalization excluding Japan. It seems relatively safe
to assume while there will certainly be volatility, this
will expand over time.
In terms of trade and investment from China to the United States, the New
York Times recently reported that China is expected to achieve a trade surplus
of some $120 billion this year. U.S. exports to China, however, are not insignificant
and during the first ten months of 2002, Chinese exports to the United States
stood at $56.5 billion while imports from the U.S. totaled $21.9 billion.
Chinese imports include agricultural products, airplanes and aviation, power
generation and oil equipment, machinery and electronics, etc.
Resources are especially important. China has become the biggest customer
for U.S. soybeans with imports running at levels equivalent to the total
production of soybeans in China. The China International Trust and Investment
Company (CITIC) has also been active. It owns a steel mill in Delaware and
a timber and has owned a timberland company in Washington State for almost
twenty years.
U.S. and Chinese firms are also forming cooperative arrangements, though
most seem directed toward China and Asia rather than the U.S. China’s
Shanghai Automobile Company and General Motors, for example, are working
together to develop light and heavy automobile models. This joint venture
plans to export high performance engines to Canada. Sinopec and Exxon Mobil
also formed a strategic alliance and Tsingtao Brewery signed a strategic
investment cooperation agreement with Anheuser-Busch. In addition, China’s
Shanghai Soap Group acquired the bankrupt Moltech, which produces rechargeable
batteries in the United States.
According to the Chinese Consulate General in Houston, by the end of 1999,
Chinese entities invested in nearly 600 trade and non-trade companies in
the United States, involving total investment of US $5.5 billion. One would
imagine this figure has gone up since that time. Chinese investments include
businesses related to garment making, appliance manufacturing, project contracting,
restaurants, transportation, resources, travel service, banking and insurance.
Two notable transactions, which may be seen as harbingers of the future are
those by the Haier Group, China’s largest white goods manufacturer.
It plans to increase U.S. sales to $1 billion in 2004 from $200 million in
2000. Before raising our eyebrows and bemoaning a further loss of jobs in
the U.S., it should be noted that Haeir plans to produce most of the extra
output from a $30 million plant it opened in South Carolina – which
employs a substantial number of local workers. In 2001 Haier also bought
a $14 million converted bank building in Manhattan to serve as its U.S. headquarters.
Information on fixed Chinese investment into the U.S. is not easy to come
by --though it seems fair to say the total is currently far below that made
by U.S. firms into China. Inflows into the U.S., however, are likely to accelerate
over time. Chinese firms have become far more active overseas and Chinese
tourists represent a dramatically increasing revenue source for many countries.
One Chinese investor Li Yuanhao, is overseeing the U.S. expansion for Holley
Group, China's largest producer of electric power meters. He was quoted about
two years ago in the L.A. Times about the need for Chinese firms to begin
moving offshore, noting "Chinese companies have to decide whether they
want to be aggressive and come out of China to get new technologies or sit
there passively and be eaten by foreign competition". Holley purchased
three U.S.-based firms in 2001 and initiated plans to move to larger quarters
in California.
It will be interesting to see whether increased Chinese investment in the
U.S. will be seen as positive steps that strengthen the U.S. economy in an
environment where there is great concern over plant closures and job cutbacks,
or if we will see the same kind of opposition as when Japanese entities began
to purchase assets such as Rockefeller Center, the golf course at Pebble
Beach and the Seattle Mariners.
Resources and technology, however, are not the only attractions for Chinese
companies in the U.S. Chinese executives are seeking to learn more about
Western management techniques and to facilitate industrial sourcing. Hangzhou
Reliability Instrument Factory, for example, was cited a few years ago for
its plans to acquire a U.S. producer of the direct current power modules
used in telecom and data transmission. Their plan was to export these products
back to China, where a construction and communications boom has created a
huge demand for these modules. Lu Qian, chief engineer for the 300-employee
firm was also quoted in the L.A. Times noting "The reason we are interested
in buying a company in the U.S. is the slowing economy. We think the price
of buying a U.S. company is reasonable now."
With the downturn of VC funding in the U.S. Chinese-born Silicon Valley entrepreneurs
have also begun to seek their funding back home. The co-founders of ServGate
Technology, for example, returned to the mainland to raise funds for their
computer network security firm. Beijing Tsinghua Unisplender Group, a leading
Chinese high-tech firm invested $500,000 and provided the U.S. start-up with
valuable contacts.
In conclusion, KWR International has been seeing more interest in our work
from U.S. firms that are seeking to better understand and to develop strategies
that will enable them to explore and to enter the Chinese market and to address
problems they are having within their established operations. To a lesser
extent, we are also talking with Chinese entities seeking the reverse. That
is an encouraging trend, which we hope reflects greater interest in the market
as a whole. The basic facts dictate that China will represent an increasingly
important source of investment, growth and trade in the world economy and
any entity that wishes to benefit must adapt accordingly.
Finally, we would be remiss if we did not point out that perhaps the most
important Chinese investment in the U.S. is in U.S. treasury bills and other
fixed income securities. This dwarfs anything else we have mentioned by a
large margin. It has profound implications, and must be examined within the
context of global macroeconomics, politics and exchange rates -- as well
as the tensions we now see surfacing as a result of the current push by Treasury
Secretary Snow and other U.S. policymakers, labor groups and corporate entities
to persuade China to revalue its currency.
Given the level of complexity and multitude of issues that must be examined
to understand this problem, however, this is something best left for another
day. It should be noted, however, that it is far from clear whether a revaluation
of China’s currency would prove to be beneficial to the U.S. economy
and as highlighted in the previous article many analysts and experts predict
that it could have a deleterious effect.
