US policy-makers and politicians often refer to commercial relations between the US and China as the main economic challenge facing the US government. Driven by voter sentiment and genuine economic trends and concerns, candidates in the presidential primaries have extensively addressed the 'China problem'. China's role in the US economy requires a better understanding of this love-hate relationship and the potential impact of this election season. So where do we stand?
Chinese investment in the US is rising significantly. In 2015, it amounted to $15.7bn, 30% higher than in 2014. Mergers and acquisitions have been an important factor in China's commercial penetration of the US, with 103 transactions worth $14bn in 2015.
Chinese direct investment in the US has had a visible positive effect. A report in April by the National Committee on US-China Relations and the Rhodium Group, an economic research firm, showed that 80% of congressional districts hosted more than 1,900 Chinese-affiliated companies, employing around 90,000 people in the US. This number is growing annually, with significant further potential. The rise of Chinese greenfield investment in the US, estimated at $1.8bn in 2015, supports critical infrastructure projects.
So where things get complicated? Public debate over Chinese risks to the US economy often conflates trade and investment issues. Most arguments on the trade side focus on trade imbalances and Chinese subsidies to local companies and state-owned entities. Those on the investment side tend to raise market-access concerns and the quest by US investors and companies for reciprocity in the Chinese market. Mixing the issues often results in lack of clarity and a rise in anti-Chinese sentiment.
It is getting real. Chinese investment has focused on US companies with a technology edge, supported by the direction of Beijing's five-year economic plan. In these cases, almost by definition, and to maintain a competitive advantage in the technology sector (including sensitive sub-industries), US investors are constantly frustrated by limited access to their Chinese counter parties, their know-how and their customers. Washington is seeking to strike a balance between keeping the door open to Chinese investors and protecting US economic and security interests.
One sector at the center of this dilemma is semiconductors, one of the fastest growing areas in the high-tech sector. The Chinese government has announced that the semiconductor industry is a strategic priority for China's economy and has set aside $100bn for potential deals. Chinese semiconductor companies have been scouring the globe to acquire companies in this field, primarily in the US as one of the world's leading semiconductor markets. In 2015, there were 21 Chinese attempts to buy a microchip maker abroad. The dollar value of such transactions tends to be very high.
Since some of the target companies use their technologies for sensitive applications such as drones and maritime intelligence, there are growing calls in US political and military circles to block some proposed Chinese acquisitions. US officials in January blocked a $2.9bn deal under which Chinese investors would have taken a controlling stake in lighting business Lumileds, a subsidiary of electronics multinational Philips.
Corporate executives and their advisers often decide not to pursue a transaction even before US regulators consider or approve it. Examples of abandoned deals in late 2015 and early 2016 include the proposed takeover of US memory chip maker Micron by a Chinese state-owned firm, and chip pioneer Fairchild Semiconductor International's proposed acquisition by Chinese state-led investors. The market will closely follow future and pending transactions, such as Chinese chip maker Tsinghua Holdings' bid for a stake in US hard-drive producer Western Digital.
The US administration has been closely following the way in which Chinese electronics companies are increasing their global market share while potentially violating sanctions regimes or posing other national security risks. The controversy surrounding ZTE, a Chinese global smartphones company, is a case in point. The US commerce department in March announced that it had banned the company from buying technology from US companies without an export license because of its commercial activity with Iran.
Rhodium Group in January valued pending Chinese merger and acquisition transactions in the US at more than $22bn, and estimated that total Chinese greenfield investment could amount to $10bn in 2016. This trend is likely to continue, but political perturbations cannot be excluded. While corporate executives are driven by commercial interest and US officials by the national interest, the election campaign and the general US political debate could have a clear effect on the direction of policy next year and beyond.