I am honored to once again be published in a great periodical, China US Focus. This week, I discuss a growing trend that deserves all of our attention: the rise of Chinese private outbound investment. You can read the article on China US Focus here, or read on below:
The Age of Chinese Outbound Private Investment
While the mainstream media debates the future of the Chinese economy, the opportunist understands that China’s rapid economic growth path is only just now starting to bear fruit. We are at the beginning of a new chapter in the Chinese economy: the age of outbound private investment.
It is no secret that during China’s historic economic rise, the country has made significant investments abroad. But up until just a few years ago, a vast majority of this investment was state-led. According to the Rhodium Group, from 2000 – 2011, 70% of China’s outbound investment was carried out by state-owned enterprises. The economic climate has changed drastically in a short amount of time. In 2012, private firms represented 80% of China’s outbound transactions, and just this year, private companies accounted for 16 out of 17 Chinese outbound M&A deals.
Private firms are increasingly looking into more mature markets like the United States to grow their companies. Top industries of choice for Chinese firms include engineering and contracting, energy and mining, household appliances, automotive, and financial services. These types of investments save and even create jobs in the United States, further integrating our two economies and building a great pie.
Recently, there have been a few high profile purchases by large Chinese companies. Last year, Chinese real estate and entertainment conglomerate, Dalian Wanda Group, purchased AMC Theatres for over $2 billion, and is gearing up to use it as a platform for further expansion into the U.S. market. Even more recently, China’s biggest pork producer, Shuanghui International, bought out Virginia-based pork producer Smithfield foods for $4.7 billion.
It’s Not Just About the Companies, It is About the People
These large-scale private purchases are merely harbingers of a greater trend of private investment and people flow between the United States and China. It truly is the dawning of a new age.
Chinese individuals are more and more looking for ways to get their assets out of China. They are spurred not only by uncertainties about the future of the Chinese market, but also certain present realities. A great majority of China’s private wealth has been built on real estate. But now, in an effort to push down inflation and prevent a housing bubble, the Chinese government has been imposed strict regulations on real estate speculation. In Beijing, for example, the purchase of a pre-owned home is now subject to a 20% tax. On top of that, even owning a second home in Beijing has been banned for new buyers.
There seem to be more changes on the horizon that are causing Chinese investors to look outward. The Chinese weibosphere (equivalent of U.S “twittersphere”) went crazy early in October when a State Council member announced that as part of the upcoming plenary session, the government is considered installing an inheritance tax.
In light of all of all this, entrepreneurial Chinese are wasting no time figuring out ways to get around this by getting out. Emigration to the West has become a preferred option. Tens of thousands of Chinese high net worth individuals are emigrating every year. They see an American green card or other residency permits in Western countries as a safety precaution; a vehicle to make it easier to move money, and their families, out.
Still, China does not make it easy on individuals to get their money out of China. According to Chinese law, an individual is only allowed to transfer up to 50,000 USD worth of Chinese yuan out of the country annually. That means that these investors need to be creative and use their network to move their assets into foreign markets.
This bodes well for foreign financial firms and money managers that stand to grow a multitude of Chinese clients in this space. Currently, there is $4 trillion of private wealth sitting around in China. Astonishingly, only 7% of that is under management. That means over $3.7 trillion of Chinese wealth is unmanaged. Why is this the case? The concept of having third party management of wealth has only begun to emerge in China. In the Chinese economy, the guanxiculture that places so much emphasis on who you know that it makes people very unwilling to trust others, even professional financial managers, with their money. But now, the learning curve that comes with investing in foreign markets is now forcing Chinese to look to professionals to help them.
New Investors, New Markets
In fact, if Americans can understand how new and untapped this opportunity is, an earnest effort to seek out and welcome private investment from China can help to resurge our economy and rebuild communities that need a kickstart. Americans and Chinese people are actual two sides of the same coin; largely what we know about each other is what we read in the newspaper. For that reason, it is no surprise that historically, individual investment in the United States from China has been concentrated in large, high-exposure markets like New York or Los Angeles. The tide could be turning, however, as more and more investors understand that those markets are becoming saturated. They are starting to look for answers elsewhere.
Take Detroit for example. Although the Detroit market on the surface seems decrepit and failed, the Detroit real estate market has struck a cord amongst Chinese homebuyers. According to the United States National Association of Realtors, the Detroit market was one of the top 5 most inquired about markets amongst Chinese real estate buyers. This seemingly is an anomaly when considering the other markets that have historically caught the eye of Chinese such as New York and Los Angeles.
In Milwaukee, we have been able to attract hundreds of millions of dollars through the EB5 program from Chinese investors. These people are becoming more sophisticated, understanding that the best, safest, and even potentially biggest boon markets in the United States are outside of the major metropolises that they have heard of.
The time is now to start building relationships of trust directly with Chinese investors. The wave of outbound Chinese investment is only just beginning; the playing field is leveled. The question is, are you ready to ride the wave?