The Shift from East to West: Chinese Investment in North America

The Shift From East to West Chinese Investment in North America 2012 has been a healthy year for Chinese investment abroad. China's interest in North America has attracted significant attention, with major transactions like the CNOOC- Nexen deal, and Dalian Wanda's acquisition of AMC Entertainment, making headlines. But not everyone is welcoming Chinese investment, with widespread public debate around national security, market access reciprocity, and regulatory transparency. Given China's interest in North America, relative to other countries, are these concerns justified? You be the judge. Foreign•Direct•Investment (FDI) FDI encompasses a range of overseas activities by a country, including mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations, and intracompany loans. FDI makes up a significant proportion of Total Business Investment in many countries. WHERE DOES CHINA RANK? World Wide FDI in 2011 (USD, billions) $60-$74 $75-$89 $90-$104 $105-$119 >$120 IN 2011, CHINA WAS RANKED th MOST ACTIVE COUNTRY in TERMS of FDI WHERE IS CHINA INVESTING? Chinese Investments Since 2005 by Major Geographic Region (USD, billions) <$49 $50-$59 $60-$69 $70-579 >$80 58.7 77.6 70.5 77.1 93.8 67.3 45.95 Investment in China (USD, billions) 108 18 In H1 2012 China as the #1source for foreign investment 2005 2006 2007 2008 2009 2010 2011 2012 Top 10 Countries for Chinese Investment (USD) Australia 45.2B Canada 17.2B United States 42B Iran 17.2B Brazil 25.7B United Kingdom 11.9B 4 Indonesia 23.3B Agentina 11.7B Nigeria 18.8B 10 Saudi Arabia 11.4B CHINA & NORTH AMERICA China isn't investing in North America as much as you might think. Foreign Direct Investment, U.S. vs Canada (by percentage) United States Canada -0.15 China 1 Ireland 2 Hungary -2 sweden Germany 2- China 2- Other Other U.K. 2 Spain -2 U.K. Islands, Caribbean 2 Austria Japan 2 France 17 Brazil Belgium Switzerland Japan 11 Luxembourg Luxembourg 57 US. U.K. 8. France Netherlands 10 6. 8. Netherlands Canada Germany Switzerland In terms of overall U.S. investment, China's contribution is very small. In 2011 they ranked 30th, just 0.15% of total foreign investment in the U.S. China's investment in Canada is also considerably small. In 2011, China ranked 9th, with investments valued at C$10.9 billion, about 1.8% of the total. In 2010. "Chinese companies spent only $3 billion on U.S. acquisitions, Thomson Reuters data shows. That is a remarkably trivial amount given the two nation's growing, Canada is now the #1 source deepening economic relations: China is one of America's top creditors and the U.S. is by far China's largest export market." But Chinese investment in Canada is for China's M&A activity. Paritosh Bansal et al, Reuters - Lingling Wei et al, Wall Street Journal WHAT IS CHINA INVESTING IN? Chinese Investment by Sector (USD, billions) Metals AA Transportation 84.1 71.9 46.5 Power Energy 4 192.1 35.2 S Finance 35 Real Estate - 13.2 Other 11.9 Agriculture -12.5 Technology China's Investment is spread across multiple industries, most notably in the natural resources sector. "What's driving China's M&A, even with the slowdown, is the recognition that, over the long term, China needs security over natural resources regardless of short-term price volatility." Ken Su, PwC China Mining Practice Leader Chinese Investments in Natural Resources (USD, billions) <$0.9 $1-$5 $6-$9 $10-$15 $16-$39 >$40 China's global share of mining deals nearly doubled in the first half of 2012 (13%) when compared with the same period a year ago. China's gas consumption is expected to double in the next 5 years. Chinese oil companies have also set ambitious targets for international production. China's Targets for Overseas Production Sinopec 2011 EEB0E 1HIIIII SLOZ China Nat. Petroleum Corp 2011 EE00ORRR0 2015 BEBBBBBBB0B00BBBBB CNOOC (% increase) 2011 - 20% 2012 - 30% 100,000 barrels per day Isabella Steger, Deal Journal China's Natural Resources Activity in North America To achieve these targets, China has made a number of successful deals in North America. 2010 1+ CIC - Penn West $1.22 billion (5%) [JV] 2010 Sinopec - Syncrude Canada $4.65 billion (9%) [JV] 2010 1+ PetroChina - Athabasca Oil Sands $1.9 billion (60%) [JV] 2010 + China Investment Corp - Teck Resources $1.74 billion (7%) [JV] 2010 BGP (CNPC)/ION - INOVA Geophysical Equipment $190 million (51%) [JV] 2010 CNOOC - Chesapeake Energy $22 billion (33%) [JV] 2011 I Sinopec - Daylight Energy $22 billion 2011 1+1 CNOOC - Opti Canada Inc $21 billion 2011 I+I CNPC - Shell Canada/South Korean Kogas/Mitsubishi $1 billion [JV] 2011 I+I Sinopec - Enbridge $5.5 billion [JV] E CNOOC - Chesapeake Energy $1.3 billion (33%) [JV] 2012 I+1 CNOOC - Nexen Inc $15.1 billion (under review) 2011 2012 1+ Sinopec - Talisman Energy $15 billion (49%) [JV] 2012 Sinopec - 5 x Devon Energy projects $22 billion (33%) [JV] However, not everyone is welcoming Chinese investment. Nationalism over resources is taking hold in North America. As a result, some deals have failed. 2004 I+I Sparked public outcry over foreign China Minmetals Corp - Noranda ownership, as Minmetals is a state-owned Chinese enterprise. $7 billion 2005 E Thwarted by US lawmakers based on CNOOC - UNOCAL national security concerns. $18 billion 2012 Blocked by President Obama after Sany Group & Ralls Corp - Committee on Foreign Investment Butter Creek Wind Farm concluded the wind farms posed security risks. It was the first time a U.S. president has stepped in to halt a foreign business deal for national ($ value not disclosed) security reasons since 1990. "The political environment can mean just as much to the success of a deal as the quality of the asset." Leslie Hook, Financial Times TROUBLED DEALS: A TWO-WAY STREET National security concerns, competitive neutrality, state ownership, market access reciprocity and regulatory transparency are all issues that have been raised in relation to Chinese investments in North America. Top 5 Nations Blocking Deals with China (USD) Australia 29.6B 4 Germany 14B United States 29.2B Nigeria 10.3B 3 Iran 16B but it seems to be a two-way street. Political tensions are not only affecting Chinese investment in the U.S., but also U.S. investment in China. China & U.S. Mergers and Acquisitions Deal volume is up, but deal value is down Yearly Value (USD, billions) I US investment in China I Chinese investment in US 12 $$ $$ 2005 2006 2007 2008 2009 2010 183 181 159 141 124 103 10 12 23 27 24 46 Yearly Number of Deals "In an effort to avoid conflicts with U.S. regulators, [China is] going after smaller.investments that are more likely to fly under the radar.Deals involving less-sensitive business are getting done. - Sudeep Reddy et al, The Wall Street Journal SUMMARY China's interest in North America has attracted significant attention. But in terms of overall North American investment, China's contribution is relatively small. China's investments are largely focused in the natural resources sector. Chinese oil companies have set ambitious targets for international production and completed a number of successful deals in North America to achieve them. However, not everyone is welcoming Chinese investment. Ongoing concerns around national security, state ownership, regulatory transparency and market access reciprocity, present some obvious challenges. Ultimately, however, it's in both China and North America's best interests to resolve their issues around foreign investment, in order to achieve increased growth, create more jobs and foster greater innovation. Presented by Firmex Intuitive, affordable, pervasive - thousands of companies choose Firmex Virtual Data Room (VDR) solutions to securely share their highly confidential documents. 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