Smithfield Stoking U.S. Unease Belies Benefit of China DealsDavid Welch, Jonathan Browning and Jeffrey McCracken
President Barack Obama’s sitdown with Chinese President Xi Jinping this weekend comes as acquisitions by mainland companies in the U.S. heighten public unease toward its economic rival. Proponents of the deals say Americans ought to relax.
The biggest ever Chinese deal in the U.S., Shuanghui International Holdings Ltd.’s $4.72 billion purchase of U.S. hog producer Smithfield Foods Inc. announced last week, touched off the latest round of suspicion. Iowa Senator Charles Grassley said he worried about the food supply while a survey showed that a majority of people want restrictions placed on Chinese investments in the U.S.
The other side of the debate is that those investments, as from any country, can reap benefits for Americans, said Stephen Orlins, president of the National Committee on U.S.-China Relations, a U.S. government-funded non-profit group.
“Chinese investment will ultimately bring the cultures closer together,” Orlins said in a telephone interview. “It creates jobs, those companies pay taxes. The investment is good for American asset prices, stock prices and pension plans.”
Smithfield investors saw that firsthand as the company’s shares rose 28 percent on May 29, when the deal with Shuanghui was announced, adding more than $1 billion in value. Public pension plans in Wisconsin, New York and California were among the stockholders. Smithfield dropped 0.2 percent today to $32.82 in New York.
Caitlin Hayden, a White House spokeswoman, didn’t respond to a request to preview the specific agenda for the talks between Obama and Xi.
While Chinese investment in the U.S. remains small overall, American anxiety is understandable given its growing presence in the U.S. and around the globe, said Erik Gordon, a business and law professor at the University of Michigan’s Ross School of Business. A survey conducted in mid-May by communications firm Hill + Knowlton Strategies said that 51 percent of Americans believe China poses the greatest threat to the U.S. economy.
“There is a public view that we have lost enough jobs to China and that they sell their stuff here but they aren’t buying much of our stuff,” said Gordon. “There is a sense of unfairness.”
The issue is the focus of a blue-ribbon, binational panel assembled by the China-United States Exchange Foundation. The group, including Bill Gates and former secretary of state Henry Kissinger, two weeks ago urged negotiations for a treaty “as soon as possible” governing investments in both countries.
Chinese acquisitions of U.S. companies have soared in the last decade, to $8.7 billion so far this year from $56 million in 2003, according to data compiled by Bloomberg. The deal volume through May 31 was already close to 2012’s record $9.2 billion and more than double the $3.9 billion in 2011.
The size of China’s purchases have grown as well. Three of the four biggest Chinese deals in the U.S. have been announced since the start of 2012, including the Smithfield acquisition. A consortium of Chinese bidders agreed to buy about 80 percent of aircraft-lease company International Lease Finance Corp. from American International Group Inc. for $4.23 billion in December. China’s Dalian Wanda Group bought Kansas City, Missouri-based theater chain AMC Entertainment Holdings Inc. last year for $2.6 billion to create the world’s biggest cinema owner.
Still, the Chinese presence in the U.S. is relatively small. China didn’t rank among the top 20 nations for foreign direct investment in the U.S. last year, according to preliminary data from the Organization for International Investment. The Netherlands was the largest last year, followed by France and Japan.
Plus, about half of the Chinese transactions in the U.S. over the past 15 months by dollar value were done by closely held companies, a change from previous years when state-owned firms dominated acquisitions in the U.S., according to the Rhodium Group, a New York-based research firm that analyzes global business and economic trends.
That should provide some comfort to Americans as private companies have shied away from buying into more sensitive areas such as technology and telecom, said Ed King, head of Asia merger and acquisitions for Barclays Plc in Hong Kong.
Private companies are also freer of government influence. A group of investors that includes Goldman Sachs Group Inc. and Temasek Holdings Pte., Singapore’s sovereign wealth fund, holds about half the shares of Shuanghui.
“Private companies have gotten larger and more sophisticated, with more financial resources,” said King.
Meanwhile, the number of Americans employed by Chinese companies, while tiny, is growing, to 32,000 from 27,000 at the end of October, according to Rhodium.
Lenovo Group Ltd., the second-biggest personal computer maker, is opening its first plant in North Carolina and will hire 115 workers to start production next year, said Thilo Hanemann, research director for Rhodium. Lenovo, with headquarters in Beijing and Morrisville, North Carolina, acquired International Business Machines Corp.’s personal computer business in 2005, the largest foreign takeover by a Chinese technology company. Lenovo has also had talks with IBM about buying its server business, according to people familiar with the matter.
Nexteer Automotive Corp., an automotive steering business sold by General Motors Co. to China’s Pacific Century Motors in 2010, said in December it plans to hire 325 workers in Michigan.
Chinese acquirers can give a U.S. company access to its growing home market, said Pin Ni, president of Wanxiang America Inc., the Elgin, Illinois-based operations of China’s Wanxiang Group. Wanxiang made 30 investments in the U.S. last year, either opening new operations or acquiring American companies, mostly in auto parts, Ni said in a telephone interview.
Wanxiang has been growing in the auto-parts business, having bought lithium ion battery maker A123 Systems Inc. out of bankruptcy last year, renaming it B456 Systems Inc. Wanxiang has said it wants to support Fisker Automotive Inc., a producer of hybrid-electric cars that is in financial trouble.
The increase in Chinese deal-making stands in contrast to the drop in U.S. takeovers of Chinese firms so far this year. U.S. companies had announced about $3 billion in Chinese deals this year through May 31, compared with $9.5 billion for all of 2012.
Some U.S. and European companies may seek to exit investments they’ve made in Chinese firms after “taking a different strategic view” of those assets, said Therese Esperdy, co-head of banking for the Asia-Pacific region at JPMorgan Chase & Co. in Hong Kong.
Accounting standards and politics share equal blame for slowing transactions into China, said Rocky Lee, head of the Asian corporate practice at law firm Cadwalader, Wickersham & Taft LLP.
“The accounting here is not as reliable,” Lee said. “There’s a lot of off-balance-sheet treatment to hide commissions or very aggressive tax minimization.”
Over the past decade, U.S. firms have spent more than twice as much on transactions in China as in the other direction, a total of $79 billion, the data show.
Critics say that number would be larger still if the Chinese government removed restrictions on foreign investments, according to Michigan’s Gordon.
Buyers can own only minority stakes in natural resource companies and financial institutions, said Wilbur Ross, founder of investment firm W.L. Ross & Co. LLC, which owns 12 plants in China and a clean energy fund that it co-owns with China Huaneng Group.
“There are some severe restrictions on foreign buyers into China,” he said.
Yet all countries impose some kind of limit on deals by foreign companies, said Ross, including the U.S. The government tightened some rules on foreign investment in national security areas in 2008 by requiring stronger oversight by the Committee on Foreign Investment in the U.S., or CFIUS. Shuanghui said it would seek CFIUS review for the Smithfield acquisition.
CFIUS has blocked at least three transactions in the past four years that would have resulted in Chinese companies gaining control of assets near military facilities. In September, President Obama barred Ralls Corp. from building wind farms near a U.S. Navy base in Oregon, the first time in 22 years a president has blocked a transaction as a national security risk.
At the same time, CFIUS approved Wanxiang’s acquisition of A123 and Dalian Wanda’s purchase of AMC Entertainment.
“Clearly people in the federal government are torn” about China, said Clay Lowery, who oversaw the CFIUS process under President George W. Bush and is now vice president of Rock Creek Global Advisors LLC in Washington. “How do we treat this country, which we don’t seem to fully trust, while at the same time we want to welcome their investments because they’re helping to create jobs?”