Particularly since the years following the 2008 financial crisis, economic and political forecasters throughout the world have focused increasingly on China’s need to re-balance its economy, keeping a close watch on the need for rising domestic consumption along with a rising private sector to offset excess reliance on other economic stimulus.
Fortunately, we are being met with consistently positive news on those fronts. According to investment research firm CLSA, China’s private sector is experiencing strong growth and is now a larger contributor to GDP than the agriculture/commodities and manufacturing sectors. We also see retail sector growth holding up well over a robust 11 percent annually.
Two Countries Realigning Their Economies
Yet the other side of the two-edged U.S.-Sino economic sword reveals not China, but the U.S. economy as experiencing remarkable and dynamic rebalancing of its own. Paradoxically, much of that rebalancing is influenced by the Chinese side of the story. Yes, Chinese investment is key to U.S. revival and it’s happening.
The U.S. economy today presents challenges and arguments – some may consider only the negative view with genuine concerns. Stagnant middle class wages for over a decade. A society which points to the very definition of a modern “societal schism.” The rich irrefutably richer than ever. As reported in an April 29, 2013, Bloomberg article, the global elite have parked somewhere between US$18 to US$32 trillion of their wealth offshore, including US$1.9 trillion in profits alone by U.S. companies, while paying little or no taxes. While there are such disquieting concerns of imbalance, there is a far brighter side to the U.S. economic story, surprisingly influenced by China. Powerful re-balancing, indeed.
Chinese Investment Contributing to US Recovery
The rising wealth of the Chinese making its way to U.S. shores is a well-known public dialogue. Will Asia’s rise led by China mollify some of the U.S.’s economic woes? I have always suggested to naysayers that the answer is a resounding “yes.” In 2014, unprecedented, rising Chinese investment in the U.S. is shifting toward residential and commercial property along with record billions of FDI into the manufacturing, automotive, tourism and IT industries.
China’s strategic motives for access to technology and know-how, plus proximity to partners and consumers reveal Chinese companies’ spending of US$2.1 billion in the first and second quarter 2014 on investments in the U.S., with more than US$10 billion worth of deals currently pending, according to research firm Rhodium Group.
Now that’s quite a fascinating paradox because, for example, one of the rising tides of economic re-balancing in the U.S. centers around “re-shoring,” that is, manufacturing moving back to American shores. A closer look reveals the global twist on just who it is that is doing much of that investing in U.S. manufacturing: China. While the Chinese government wishes to promote exports and manufacturing at home, it seems China’s wealthy and their companies have other ideas to gain their share of the market.
Virginia Commerce and Trade Secretary Jim Cheng chimes in on the subject during his November 2013 talk at Old Dominion University’s Confucius Institute in Norfolk. “Manufacturing is returning to the U.S.,” he said. “It’s coming back because the cost of doing business here is getting more competitive because of our ports, distribution systems and technology. They want to be close to their customers.”
Automotive Sector to Benefit
According to Michigan Governor Rick Snyder, there are at least 50 Chinese auto-related companies (A December 2013 Christian Science Monitor article since states there are now over 100) that have set up shop in the Detroit area. Among them we find Pacific Century Motors, partly owned by the Beijing city government, which for US$450 million bought Nexteer, a General Motors unit that makes steering equipment and employs thousands. Chang’an Motors, Ford’s Chinese partner, is opening an R&D center in Detroit. A presence in Detroit gives the Chinese companies highly desired advantages: access to global auto technology, talent and affordability.
As we step away from the automotive sector, we see a rising tide of Chinese capital inflows in the residential and commercial real estate sectors across the country. Buyers from Greater China spent US$22 billion on U.S. residential homes through March 2014, up 72 percent from the previous year, and more than any other nationality, according to the National Association of Realtors.
More importantly, many analysts and authors on China are finally seeing how the key fits in the proverbial front door; the trend is not only driven by the wealthiest Chinese, but by a much larger demographic population of increasingly affluent middle-class Chinese households. My own book research, supported by a 2010 Credit Suisse report on China’s off-the-books, shadow economy and an excellent April 2013 New York Times article by David Barboza, indicates that Chinese middle class households have far more cash than official data indicates.
Buying Power Reflected in Real Estate
A July 2014 Bloomberg article reveals Chinese residential buyers paying a median price of US$523,148 per transaction. In Arcadia, Calif., where the median price is far higher at US$1.18 million, Re/Max agent Peggy Fong Chen, a Hong Kong native, says more than 75 percent pay cash, often with the intention of buying the property as a place for their child to live when they move to the U.S. to study at university, while gaining more attractive rental income returns until then.
On the commercial real estate side, the investment trend is gaining even greater momentum. California, Texas, New York, Michigan and Illinois are the current top five Chinese investment destinations. China is easily the fastest-growing source of FDI in the Unites States, having spent US$4.3 billion on commercial property alone in 2013 – more than in the previous five years combined.
According to the Rhodium Group, after spending more than US$14 billion on U.S. acquisitions and greenfield projects last year, Chinese companies announced more than US$8 billion worth of deals in the first quarter of 2014, with first quarter transactions reaching an all-time quarterly high. CNBC recently called the movement of Chinese capital “one of the largest and most rapid wealth migrations of our time: hundreds of billions of dollars, and waves of millionaires flowing out of China to overseas destinations.”
As we recognize the current generation of Chinese coming into unprecedented new wealth, we are witnessing the outward bound pattern of their spending across the globe. Much of it created by China’s economic reforms, for the first time in their lives do they possess both the access and the affordability to make overseas purchases and investments, travel and spend for leisure, and choose international education for their children – all of which was virtually off limits to them in the not too distant past. Until 2008, my Chinese mother-in-law, a retired school teacher, had never been on a plane, let alone an international flight, a story that echoes across the society.
With the U.S. rebalancing now experiencing healthy growth in the manufacturing, export and real estate sectors buttressed by unprecedented Chinese FDI across all of those key sectors, there are remarkable, dual opportunities in the U.S.-China dynamic, offering much impetus to continue moving through differences and toward greater mutual benefit.
Mario Cavolo is Vice President, Scott PR China, Shanghai, and the author of China: The Big Lie? Published in North America by Sino Media International under their Long River Press imprint.