Debate Heightens as to Whether and When Inbound FDI from China Will Increase
How likely is it that the remainder of 2009 will see an upsurge of mergers and acquisitions or other investment activity from China?
Financial Web site 24/7 Wall St. provided its answer in a September 1 post, arguing that, in spite of China’s insatiable appetite for energy deals, that nation is more than reluctant to invest in the U.S. 24/7 Wall St. catalogued announced deals over the past year with public companies across the globe and tallied $50 billion of oil and gas purchases, as well as uncounted unannounced deals, without the merger or acquisition of a single U.S. public oil company:
As asset prices sink, it is easier for China and its central government to buy more and more of whatever it wants on the cheap. . . . [T]he pace at which China is locking in energy supply deals seems to only be increasing. And it is effectively doing it without a single handshake taking place on U.S. soil and without U.S. oil.
The post suggests that the 2005 CFIUS action that blocked Chinese National Overseas Oil Corporation from acquiring Unocal—later acquired by Chevron—still looms as a basis for Chinese buyers to avoid U.S. deals. This view discounts the Obama Administration’s desire to turn the page on the actions of the prior Administration, as recently shown by the July Chinese/U.S. cabinet-level meetings held in Washington, discussed in this blog’s August 6 post.
As Exhibit I to 24/7 Wall St.'s position, there was the August 31 announcement from Athabasca Oil Sands Corp. of its joint venture with PetroChina International Investment Company Limited, a wholly-owned subsidiary of Asia’s largest oil and gas company. Through the venture, PetroChina has agreed to acquire a 60% working interest in AOSC's MacKay River and Dover oil sands projects for $1.7 billion. The agreements also provide for certain financing arrangements for AOSC. The projects are located in the centre of the Athabasca area in northeastern Alberta and have been independently assessed to contain approximately 5 billion barrels of bitumen resource.
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Looking more broadly, however, there is a significant amount of FDI that is directed at the United States, particularly in areas other than the energy sector, and the future seems quire promising. The International Trade Administration (ITA) of the U.S. Department of Commerce recently reported that from 2004 to 2008 the FDI position of the Asia-Pacific nations in the U.S. grew at an average annual rate of 10%, exceeding the global average growth rate by 25%. The annual growth rate of FDI from China into the U.S. during that period was 23%. Although this growth rate was not as high as that of Singapore (49%) or India (48%), it approximates that of South Korea. It can hardly be considered to be negligible.
The ITA cites three motivating factors that drive FDI: access to innovation, markets and resources. The ITA makes that case that the U.S. excels in each category, noting that, "In many cases, Asian-Pacific companies do not invest in the United States solely to minimize the cost of inputs, such as . . . natural resources . . . ." Therefore, although the U.S. can offer a workforce with high productivity to offset its higher cost, a highly efficient transportation system and openness and transparency, in the natural resources sector, our assets may come with costs that compare unfavorably to Canada, Australia and other markets.
The ITA report states that "the United States should expect large increases of FDI flows, especially from China and India . . . ," the third and twelfth largest world economies. Based on trend evidence accumulated over the past 50 years for other economies such as Japan, the relative and absolute amounts of their OFDI into the U.S., ITA predicts that OFDI from those nations will increase to be in line with their rankings. The report also points to academic studies demonstrating that developing nations generally promote OFDI and eventually become net outward bound investors. Those trends cannot occur without significant investment into the US from Asia-Pacific nations in general and China in particular.
The ITA report asserts that inbound FDI will occur. Nonetheless, the predicted influx seems to not yet be occurring, as 24/7 Wall St. points out. Q4 of 2009 may reveal more as to which camp has the better argument.
