A sign hangs on One Chase Plaza in lower Manhattan on Oct. 14, 2014 in New York City. The iconic building is owned by a Chinese private equity firm as part of its overseas investment strategy.  (Spencer Platt/Getty Images)A sign hangs on One Chase Plaza in lower Manhattan on Oct. 14, 2014 in New York City. The iconic building is owned by a Chinese private equity firm as part of its overseas investment strategy.  (Spencer Platt/Getty Images)

Chinese investments in the United States reached a new record level of $18.4 billion in the first half of 2016, up three times compared to the same period last year, and even higher than all of last year ($15.3 billion).

Strong mergers and acquisitions activity accounted for the majority of the incoming Chinese capital, said research firm Rhodium Group.

With the stock market crash in China that began in June 2015, the flow of outbound investment from China to the rest of the world soared. With growing uncertainty about exchange rates and the economic and political outlook, investors are seeking to stash away capital in safe havens like the United States.

“The rapid growth of Chinese outbound (Foreign Direct Investment) FDI in the first half of 2016 has triggered political reactions both in China and host economies,” Rhodium stated.

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This capital flight has led to a further deepening of FDI deficit in China’s balance of payments. So Chinese regulators are increasing their scrutiny of outbound investment transactions.

“China’s leadership continues to pledge its commitment to further external liberalization, but concerns about capital outflows have clearly grown and the State Administration of Foreign Exchange (SAFE) and other regulators have taken informal steps in recent months to ‘manage’ the outflow of foreign exchange,” the research firm said.

The appetite of private Chinese companies for U.S. investments remains high.

—  Rhodium Group

This has increased concerns about the ability of Chinese companies to close deals, driving up risk premiums and reverse break fees for Chinese buyers.

A sharp uptick in the Chinese deal-making activity in the United States is also keeping U.S. regulators busy.

The Committee on Foreign Investment in the United States (CFIUS), reviews foreign acquisitions for national security threats and China for the last few years has been in the top spot for covered transactions (transactions that result or could result in control of a U.S. business by a foreign person).

A number of transactions have run into delays because of CFIUS and other regulatory reviews including Syngenta, Ironshore, Fidelity & Guaranty Life, according to the Rhodium report.

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Strategic Versus Financial Investments

The Chinese investments in the United States in 2016 were spread across a wide range of sectors including entertainment, consumer products and services, technology, and automotive.

Besides M&A activity, Greenfield projects, where companies start building their operations from scratch, were also strong, driven by capital-intensive projects in real estate and manufacturing.

More than 80 percent of all Chinese FDI transactions in the United States in 2016 are considered as strategic investments (firms investing in their core areas of business). The largest strategic investment was Haier’s acquisition of GE’s home appliances business for $5.6 billion, in consumer products sector. And the second largest was Wanda’s purchase of Legendary Entertainment for $3.5 billion, in the entertainment sector.

Other sectors attracting large investments include information and communication technologies (acquisition of Omnivision Technologies by a Chinese consortium for $1.9 billion) and automotive (Ningbo Joyson’s acquisition of Key Safety Systems for $920 million).

Financial investments (investments for financial returns) amounted to $3.5 billion, or 20 percent of total investment in 2016, according to Rhodium. Most of them were driven by private investors buying commercial real estate assets in major coastal cities.

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Outlook

The value of announced but not yet completed Chinese investments was still close to an all-time high of $33 billion at the end of June 2016, according to the report. Major M&A transactions include HNA Group’s $6 billion bid for technology distributor Ingram Micro, Anbang’s $6.5 billion acquisition of Strategic Hotels & Resorts, and Apex Technology’s acquisition of Lexmark for $3.6 billion.

There are also pending investment in real estate development projects in New York and California.

“The appetite of private Chinese companies for U.S. investments remains high. … It is reasonable to assume that recent geopolitical shocks (Brexit) and related USD strength will aggravate capital outflows in coming months,” Rhodium said.

“This makes it likely that regulators will continue or even increase scrutiny of outbound FDI transactions, particularly for deals involving large amounts of foreign exchange and those with a financial nature.”

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