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The Chinese want to buy more American companies — and we should let them -
The Washington Post

https://www.washingtonpost.com/opinions/the-chinese-want-to-buy-more-american-companies--and-we-should-let-them/2016/04/01/ce4f811c-ef72-11e5-85a6-2132cf446d0a_story.html

The Chinese want to buy more American companies — and we should let them

China was poised to make its largest-ever investment in the United States
this past week, after the Chinese insurance group Angbang topped Marriott
in a bidding war for the Starwood hotel chain. The offer was extremely
attractive: $14 billion in cash. But a chorus of skeptics urged Starwood to
say no.

“Who are these guys?” Bloomberg News anchor Tom Keene asked
<http://www.bloomberg.com/news/videos/2016-03-29/will-marriott-lose-out-on-starwood-to-china-s-angbang>.
“It’s the Butch Cassidy analysis here. I have absolutely no clue what their
balance sheet is. I have no clue how they’re going to finance this puppy.
And more than anything: What’s their link to the Chinese government?”

Over at MarketWatch, columnist Tim Mullaney wrote
<http://www.marketwatch.com/story/starwood-should-go-to-marriott-its-good-for-america-and-shareholders-2016-03-29>:
“Anbang’s CEO is no less than the son-in-law of deceased former Chinese
leader Deng Xiaoping. While still an also-ran in China’s insurance market,
it has easily arranged changes in that nation’s regulations to let it
invest more in asset management and offshore real estate. They couldn’t get
better service from Beijing if they invited the Communist Party’s central
committee to the wedding.”

The deal also faced scrutiny from the powerful but obscure Committee on
Foreign Investment in the United States (CFIUS), which is charged with
assessing the national security implications of these sorts of
transactions. Buying a hotel chain wouldn’t seem to present a particular
threat. But Angbang’s purchase of New York’s Waldorf Astoria was reviewed
<https://www.washingtonpost.com/business/economy/us-reviewing-waldorf-astoria-sale-to-chinese-firm/2014/10/13/8ebf1e80-50c8-11e4-babe-e91da079cb8a_story.html>
in 2014. That deal ultimately got a green light, though the U.S. delegation
to the United Nations moved its base of operations out of the hotel
afterward.

Unfortunately, we’ll never know what regulators would have made of the
Angbang-Starwood deal. On Thursday, the Chinese company announced that it
was withdrawing its bid “due to various market considerations.” The intense
pushback certainly didn’t help — and it’s part of a troubling trend.

Suspicion of Chinese motives is hardly new. After all, blaming China for
America’s economic ills has been a theme of the past three presidential
elections. But within the U.S. government and business community, there’s
intensifying concern — ranging from wrong but reasonable to paranoid and
hysterical — that China’s drive to invest in the United States is not
benign.

The far smarter response would be to embrace Chinese investment. Rather
than being a threat to U.S. security, it’s the best way to reduce future
tension.

As China’s economy and reserves have grown, so has its appetite for
investing abroad. According to the Rhodium Group
<http://rhg.com/interactive/china-investment-monitor>, in 2006, China did
39 deals worth $195 million in the United States. By 2015, that had
mushroomed to 171 deals worth $15.3 billion. And already this year, Chinese
investors have completed transactions in the United States totaling more
than $3 billion, with an additional $26 billion in the pipeline.

China’s appetite encompasses multiple industries. The country’s State
Council
<http://english.gov.cn/premier/news/2014/12/24/content_281475028954646.htm>
has encouraged companies to pick targets that will help “raise the
international competitiveness of Chinese products,” among other goals.
Noteworthy deals that have gone through this year include General
Electric’s $5.4 billion sale of its appliance division to Haier and
Hollywood studio Legendary Entertainment’s $3.5 billion acquisition by
Dalian Wanda (which already owns AMC Theaters).

But as Chinese deals in the United States have become more numerous and
more ambitious, there’s been more resistance.

Acquisitions involving Chinese investors represent the largest portion
<https://www.treasury.gov/resource-center/international/foreign-investment/Documents/Annual%20Report%20to%20Congress%20for%20CY2014.pdf>
— nearly 20 percent — of transactions reviewed by CFIUS, even though China
still trails other countries
<http://www.ofii.org/sites/default/files/FDIUS2014.pdf> in its direct
investments in the United States. And members of Congress are pressing
CFIUS to expand the scope of its reviews. For instance, Sen. Sherrod Brown
(D-Ohio) wrote a letter
<https://morningconsult.com/wp-content/uploads/2016/03/Brown-Lew-CFIUS-0323161-1.pdf>
last month asking the committee to look at patterns of investment,
ownership structure and “all possible mitigation measures to protect
Americans.” Previously, Rep. Rosa DeLauro (D-Conn.) introduced a bill
<https://www.congress.gov/bill/113th-congress/house-bill/5581> requiring
regulators to assess economic and public health impacts.

Beyond Starwood, this pushback has scuttled a number of high-profile deals.

Last summer, security concerns prevented Tsinghua Unigroup, a state-owned
semiconductor company, from buying memory-chip maker Micron Technology for
$23 billion, which would have been the largest Chinese acquisition of a
U.S. company by far. In February, another state-owned Chinese company bid
$3 billion for Fairchild Semiconductor. That transaction fell apart after the
Fairchild board
<https://www.sec.gov/Archives/edgar/data/1036960/000119312516463934/d22910dsc14d9a.htm>
“concluded that there is some non-negligible risk of a failure to obtain
CFIUS approval.” Also in February, Tsinghua yanked its multibillion-dollar
bid for hard-drive maker Western Digital after CFIUS decided to launch a
review. “There was a strong feeling that the regulators were going to run
the deal down,” a source close to Tsinghua told the Financial Times
<http://www.ft.com/intl/cms/s/0/c235a154-da37-11e5-98fd-06d75973fe09.html#axzz44UtmPmLm>
.

It’s true that semiconductors and hard drives have some security
implications. The deals nixed, though, didn’t involve ultra-sensitive
National Security Agency equipment but rather mass-produced, commoditized
technology. In theory, China could play Manchurian candidate with such
technologies, but the Chinese government already has the capacity to
disrupt the semiconductor supply chain through its own domestic factories
and with its various cyberwar investments. It doesn’t need to spend tens of
billions in foreign investment to acquire destructive capacity.

Even deals that have at best minimal security implications have encountered
stiff opposition. In February, a Chinese company’s planned acquisition of
the Chicago Stock Exchange led 46 members of Congress to draft a letter to
CFIUS opposing the deal <http://media.bloomberg.com/bb/avfile/r_Bcr9aJ.Gzk>.
Separately, Rep. Robert Pittenger (R-N.C.), a member of the House Financial
Services Committee, warned
<http://www.foxnews.com/opinion/2016/02/23/rep-pittenger-chinese-bid-for-chicago-stock-exchange-must-be-fully-investigated.html>
that “China has historically been the leading market and currency
manipulator” and that control over an exchange would enable it to unleash
havoc on the U.S. economy. He neglected to mention that fewer than
1 percent of all trades in the United States are handed by the Chicago
exchange.

Lawmakers were similarly incensed by a Chinese company’s effort to buy
Smithfield Foods in 2013. It took months of lobbying by Shuanghui
International to get regulator approval, amid concerns about theoretical
contamination of the U.S. food supply. Those concerns largely missed the
reason for the acquisition: to provide safer pork (produced in the United
States) for Chinese consumers. If the motives were pernicious, there are
far easier and more devious ways to disrupt the U.S. food supply.

And in January, Dutch conglomerate Philips terminated a planned sale of its
LED business for nearly $3 billion to Chinese investor GO Scale
Capital “because
of inability to resolve CFIUS’ unforeseen concerns
<http://www.newscenter.philips.com/main/standard/news/press/2016/20160122-Philips-and-consortium-led-by-GO-Scale-Capital-terminate-Lumileds-transaction.wpd#.VvyIW4Q9XzK>.”
While LED bulbs certainly make their way into military equipment, it’s a
stretch to argue that national security issues were strong enough to kill
the transaction — unless a new generation of bulbs would have come equipped
with smart chips that could turn under-the-kitchen-cabinet lights into
surveillance devices for the Chinese Communist Party.

Instead of raising the battlements, the United States should adopt a policy
that follows the old adage “keep your friends close and your enemies
closer.” The best way to preserve American security and prosperity and to
keep China’s aggression in check is not to resist China’s desire to invest
but to encourage it.

The more money Chinese companies pour into the United States, the more
motivation China has to maintain good relations and the more it has to lose
if relations turn sour. If you are Chinese President Xi Jinping, the scale
of these investments and capital flows becomes a serious consideration
every time you contemplate an overture to Russia, or policy toward North
Korea, or whether to menace that trawler in the seas around Vietnam. It is
a factor when assessing how to value the yuan, and how much to confront or
accommodate the United States on issues ranging from tariffs to trade
agreements.

Consider that the last crisis in U.S.-China relations occurred in 2001,
when a U.S. spy plane crashed
<https://www.washingtonpost.com/news/worldviews/wp/2016/01/15/that-time-u-s-soldiers-were-detained-overseas-by-a-hostile-power-and-america-said-sorry-twice/>
on Hainan Island and put tensions on high. It may be purely coincidental
that nothing even remotely as incendiary has occurred since China joined
the World Trade Organization in December of that year and began its foreign
investment push. But it’s striking how the U.S.-China relationship — which
has all the seeds of a serious and adversarial rivalry — has avoided any
serious bouts of angry words, let alone retaliatory action.

Economic ties may not guarantee peace and prosperity, but they do increase
the incentives to negotiate differences and accommodate the needs and
sensitivities of economic partners. That was the original intent, for
instance, behind the creation of the European Union, which for all its many
failures nonetheless helped end centuries of deadly conflict between the
European powers.

Somewhat surprisingly, in a presidential campaign season that’s been heavy
on anti-China rhetoric, one person who seems to understand the benefits of
Chinese investment is Republican candidate John Kasich. Speaking with ABC’s
George Stephanopoulos last month, the Ohio governor extolled how a Chinese
company has created jobs by setting up an auto-glass manufacturing
operation in a previously shuttered General Motors plant. “I was just in a
plant in Dayton, where we have a half-a-billion-dollar investment from the
Chinese, and they’ve employed over 1,000 people there,” Kasich said
<http://www.realclearpolitics.com/video/2016/03/13/kasich_touts_chinese_foreign_direct_investment_in_ohio_employed_over_1000_people.html>,
adding, “I was intimately involved in bringing that to Ohio.”

We need to make it easier for China to invest in America. Not only would it
help invigorate domestic industries, but it would also provide a path to
greater security. If instead we let our fears lead us to greater
isolationism, we will surely lose.

* Twitter: @zacharykarabell <http://www.twitter.com/zacharykarabell> *

Read more from Outlook <http://www.washingtonpost.com/opinions>:

Five myths about China’s economy
<https://www.washingtonpost.com/opinions/five-myths-about-chinas-economy/2016/01/07/08a8d5e6-b4c4-11e5-a842-0feb51d1d124_story.html>

Let China win. It’s good for America
<https://www.washingtonpost.com/opinions/let-china-win-its-good-for-america/2016/01/14/bfec4732-b9b6-11e5-829c-26ffb874a18d_story.html>

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and Twitter <http://www.twitter.com/postoutlook>.


Eric D. Schwerin
eschwerin@rosemontseneca.com

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