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CHINESE FDI IN THE US RISING

08 June 2016

Chinese investors are targeting the US, but concerns about the regulatory environment are widespread

Chinese investors are increasing their overseas capital flows into the US on the back of China's slowed economic growth and a need to diversify investments. In the recently released Foreign Direct Investment Report 2016 produced by US-based international law firm O'Melveny & Myers, findings predict that the year ahead will see unprecedented levels of Chinese investment overseas, especially into the US.

The political and economic changes causing turmoil in Chinese markets are the main factors behind this surge in investment, said the report, which is comprised of responses from strategic and financial investment executives. China's slow- down has pushed its government to promote freer movement of capital. The US market and its growth potential are highly attractive to Chinese investors – the Economist Intelligence Unit recently named the US as the number one ranked destination for FDI attractiveness to Chinese firms.

"This is a reflection of the strong pull factors that have long existed in the US for investment, and that is being exacerbated by the slowdown in China and the desire to geographically diversify investment by businesses there," said Steve Olson, a partner at O'Melveny & Meyers. "The US pull factors include historically low energy prices, the fact that it is the largest fully developed consumer market in the world, and the notion that to be a truly global brand, you have to have a US presence, and the Chinese appreciate that.

"We're seeing more and more private Chinese companies, some of which are very successful and quite large, making investments," noted Mr Olson. Early rounds of many energy sector investments have been largely by state-owned enterprises, but FDI from private companies is on the rise, according to the report.

Sectors receiving the greatest investment are mining and energy production, but more recently Chinese FDI inflows have been reaching healthcare, technology and real estate as well as the entertainment sector, where Shanghai-based Wanda Group recently purchased US media company Legendary Pictures.

"The valuations are still relatively good in many sectors, and states and local governments are still eager and incentivised to get this investment," said Mr Olson. "This contrasts with what you are hearing at a federal level where politics is rearing its head, but that is always going to exist."

Meanwhile, 48% of respondents to the survey viewed the US's regulatory regime as the greatest barrier to investment, while 38% saw it as an attractive attribute. "We are blessed with an effective and predictable legal system, but businesses in the US face a high rate of litigation," said Mr Olson.

"Where things go awry is where investors who are relatively new to the US do not appreciate the regulatory regime and the processes that these investments require. Litigation is the same – you need to anticipate the possibility of security litigation [by] the losing bidder.

"The perception can be serious and it can be a barrier – the way to get around that is to have competent and experienced advisers in the US who are thinking about these things," added Mr Olson. "The Chinese are new to it."

The Financial Times Limited, 2015. All Rights Reserved ​


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