China: The Next Major Investor in American Markets?
American and Chinese negotiators are hard at work on a Bilateral Investment Treaty (BIT), the next step in closer, more productive relations between the world’s two largest economies. While U.S. negotiators have rightly focused on improving access for U.S. firms to Chinese markets, policy makers should not lose sight of the growing importance of Chinese investment here. Just a few years ago, Chinese foreign direct investment in the United States was measured in tens of millions of dollars, but that inbound capital has now progressed well into the billions, a trend expected to continue. Yet while foreign investment in the United States is almost always seen as an unambiguous good—shoring up domestic operations of existing businesses or spurring the creation of new jobs and capital—many view this new development with caution, if not outright suspicion.
When Toyota invested in Tesla’s advanced battery operations in 2010 and launched a joint-development deal 2011, it was seen as a critical validation for a company that is quickly becoming an iconic American brand. InBev’s acquisition of Anheuser-Busch bruised the patriotic pride of some, but there was little sense of social dread about a change in ownership. Investment from China, in contrast, is viewed with a more jaundiced eye. Smithfield Foods, an American meat-processing brand for more than seventy-five years, was recently purchased by Chinese agricultural giant Shuanghui Group. Few worry that Japan plans to derail American electric car technology or that Belgium is plotting to destroy the U.S. domestic bar and pub industry. Yet at a meeting of the Senate Committee on Agriculture, Senator Debbie Stabenow warned, “we need to evaluate how foreign purchases of our food supply will affect our economy broadly.” Is foreign investment from China really different and deserving of more scrutiny than investment from other countries?
Put simply, yes.
In China, the role of the state and the Communist Party looms large. Because of their influence, Chinese companies operate in a legal, political and economic framework very different from our own or those of many of our largest trade partners. Giant state-owned enterprises (SOEs) were the initial pioneers of China’s early economic boom and still command impressive market positions to this day. These companies, whose top officials are appointed by the Chinese Communist Party, sometimes spent those early years acting as instruments of state policy, prioritizing strategic incentives over market-based ones. As a result, some investment projects were intended to strengthen Beijing’s ties to Hong Kong or to cultivate allegiances in the developing world, rather than to make money. Later, China sought to protect SOEs from foreign competition and create domestic champions in key industries. The Chinese government heavily subsidized SOEs or used policy measures such as investment approval to advance its nonmarket goals. Recent Chinese export restrictions on rare-earth metals, over which state-owned Baotou Steel holds a near global monopoly, are a prime example. While these restrictions are certainly protectionist, they could also be seen as asserting national control over a strategic asset: rare earths are crucial components of advanced technology manufacturing, such as that practiced by countries like the United States and Japan.
These kinds of behaviors are why Chinese investment should be viewed differently from that of Japan or Belgium; when the companies doing the investing are closely tied to a government considered a geopolitical rival, their actions warrant extra scrutiny. The Committee on Foreign Investment in the United States (CFIUS) exists to provide that scrutiny. Charged with reviewing foreign transactions with potential national-security implications, CFIUS approves the vast majority of the cases that come before it. However, the operations of state-owned enterprises likely receive close attention from CFIUS, because the sheer size of such firms may make them capable of manipulating strategic assets and resources if their state owners so wish it.
While CFIUS certainly should monitor such threats, their likelihood seems to be diminishing. As the Chinese economic system liberalized and grew in the 1980s, state-owned enterprises became more numerous and more responsive to economic forces (though many subsidies persisted). Market goals began to reach at least parity with state goals, though basic materials and resource extraction remained the hallmark of early Chinese outbound investment. Scholars like Kevin Cai found that, by the 1990s, most state-owned enterprises were reliably prioritizing market goals more highly than state goals. That said, a large portion of Chinese economic activity abroad remained dominated by these subsidized institutions of the Chinese state.
As China’s private sector develops, however, private Chinese firms are beginning to play a larger overseas role. According to data gathered by the Rhodium Group, over the last two decades the total value of Chinese private-sector investment in the United States has expanded substantially, matching or exceeding that of state-owned enterprises. Since the year 2000, government-owned investment in the United States has topped $18 billion, while smaller but much more numerous privately owned companies have invested almost $22 billion.