Weak Dollar Fuels China's Buying Spree Of U.S. Firms Foreign Cash Ignites Political Concerns
Washington Post
By Ariana Eunjung Cha
Washington Post Foreign Service
Monday, January 28, 2008; A01

SHANGHAI -- From his posh office in a coastal city in eastern China, millionaire Zhou Jiaru oversees more than 100 workers at an auto parts refurbishing factory he purchased in a struggling manufacturing town on the other side of the world.

Zhou's new company is in Spartanburg, S.C.

The Chinese entrepreneur bought it from Richard Lovely, a 56-year-old industrial engineer and mechanic who says his business was in dire straits because of competition from abroad.

Zhou's 85 percent stake in the company now known as GSP North America is one example of how the weak dollar and weakening U.S. economy have made the United States a bargain for overseas companies shopping for investments.

In 2007, acquisitions in the United States by foreign ventures hit $407 billion, up 93 percent from the previous year, according to Thomson Financial. The top countries investing were Canada, Britain and Germany; the Middle East and Asia -- especially China -- are quickly catching up.

The biggest deals in recent months have involved Wall Street firms hit by losses from exposure to mortgage-related investment vehicles.

Saudi Prince Alwaleed bin Talal is once again coming to Citigroup's rescue. Canada's Toronto-Dominion Bank is buying an $8.5 billion share of Commerce Bancorp. Singapore's state-run Temasek Holdings purchased a stake in Merrill Lynch valued between $4.4 billion and $5 billion. And the sovereign wealth fund that invests the Chinese government's hard currency is injecting $5 billion into Morgan Stanley, while Citic Securities, a private Chinese firm, is investing $1 billion in Bear Stearns.

But the investment hasn't stopped there. Smaller companies in remote parts of the United States are also being bought out.

"The U.S. dollar is getting weaker and weaker, and many medium to small U.S. companies are in economic crisis. So they need investments from China. It is very good timing," said Yu Dan, a representative for the state of Pennsylvania in China.

Yu, who is one of about 30 people in China who represent American cities and states, said at least six Chinese companies are in the process of closing deals in Pennsylvania. One will make some purchases in the food industry. Another will invest in the wood industry, because as Yu put it, "Pennsylvania has very good hardwood resources, and the aboriginal people in the north Pennsylvania woods are good workers."

Aboriginal people? The Amish, Yu clarified.

As the dollar's value against other currencies fluctuates, the tricky part for foreign investors is buying at the right time. When the dollar is falling, there's a danger in overpaying. The $3 billion stake that China Investment Corp. bought in Blackstone last May, for instance, is now worth closer to $2 billion.

Much of the recent overseas investment in the United States has been driven by sovereign wealth funds backed by foreign states. While these funds comprise only about 1.5 percent of the $165 trillion of global traded securities, they are growing quickly.

The funds -- at least a dozen of which were created since 2000 -- now control about $2.5 trillion. Morgan Stanley's Stephen Jen estimates that their worth will jump to $12 trillion by 2015.

For much of their half-century history, sovereign wealth funds have been seen as ideal investors by many U.S. firms. They have deep pockets and a long-range investment horizon, and they have shown little interest in interfering in the operations of the firms they invest in.

"The vast majority of sovereign wealth funds are long-term investors that tend to take very small stakes in companies without seeking to control or influence companies," said David M. Marchick, head of global regulatory affairs for Carlyle Group, a private-equity firm in the District. "They are just along for the ride."

But as recently as a few years ago, when credit flowed more freely, some members of Congress expressed alarm about acquisitions of strategically important entities like oil companies and ports by outside funds backed by foreign states.

These days, the general weakness in the U.S. economy has touched off a fresh wave of concern.

"Foreign investment, in general, strengthens our economy and creates jobs. But as investments by sovereign wealth funds in American companies increase and the specter of control and undue influence by government entities looms, we have to be careful," said Sen. Charles E. Schumer (D-N.Y.).

Sen. James Webb (D-Va.) said in a statement that "governments are motivated by a broader range of factors than commercial investors."

"While foreign governments may invest money in a country to make a profit, they may also do so in order to further their foreign policy ambitions, to acquire national security assets, or to purchase a stake in strategic industries," Webb said.

The fact that little is known about the funds' assets, liabilities or investment strategies only exacerbates worries.

"Most of them are not transparent and don't seem to be accountable to anybody, including their own people," said Edwin M. Truman, a senior fellow at the Peterson Institute for International Economics, who has testified before Congress about the funds. He said that a large group of sovereign wealth funds is engaged in discussions with the International Monetary Fund to develop a set of best practices for such funds.

Much of the concern about foreign investment has been centered on China, where the line between private industry and state enterprise is often blurry. A 2005 attempt by the China National Offshore Oil Corp. to buy California-based Unocal fell apart because of political opposition.

While the money coming from China is still limited -- $9.6 billion in 2007, up from $66 million the previous year, according to Thomson Financial -- it is reminiscent of the Japanese and German buying sprees of U.S. firms in the 1970s and '80s.

One place where the trend is playing out is South Carolina, where nearly 21 percent of the manufacturing labor force works for foreign companies, the biggest proportion in any state except Hawaii.

It's also a place with high unemployment -- 6.6 percent statewide and 10 to 15 percent in some counties, according to December 2007 figures. South Carolina has also led the fight against outsourcing of jobs overseas. But in recent years the opposite has occurred: Chinese companies have invested in South Carolina -- albeit on limited terms.

Haier, a Chinese appliance maker, has a refrigerator factory in the state. There's also a Chinese-owned chemical factory, printing company and general construction company, among others, that in total employ thousands of South Carolinians, according to John X. Ling, the state's representative in China.

The low cost of land, cheaper than in China's major cities, and electricity -- which tends to be about a third or a fourth the cost in China -- are attractions. So is the idea of being closer to American consumers, their primary customers.

Zhou, 54, who purchased the auto refurbishing company in Spartanburg, said another factor has to do with politics.

"We look at the example of the Japanese company Honda. . . . The U.S. was against the dumping of Japanese cars at low prices, but Honda was not affected because it had operations in the United States," he said.

Zhou is the founder and chairman of Guanshen Auto Parts Manufacturing in Wenzhou, a city about 260 miles southwest of Shanghai that has an almost mythical reputation for capitalist wealth. When U.S. business delegations come to China seeking investments, Wenzhou is a popular stop.

Guanshen Auto is a leading supplier of constant-velocity axles, which transfer power from a vehicle's transmission to its wheels. Lovely's company, Powerline, refurbished old CV axles and sold them.

Zhou made his initial purchase of a stake in Powerline in 2005, a few months after the Chinese government did away with its currency's long-held peg to the dollar and its value began to rise. As the dollar continued to weaken in 2007, Zhou bought more of the company, renaming it GSP North America after the Chinese initials of the parent company. After having paid a total $1.3 million, Zhou now owns 85 percent of the South Carolina factory.

He said that the factory employees were apprehensive about working for a Chinese company. "People objected. When we went to visit the factory, American workers said, 'We work for Chinese now. We don't have face,' " Zhou recalled.

Lovely, who remains chief operating officer of the company and still owns 15 percent, himself was apprehensive. "People said, 'You're very gutsy to do that.' . . . It was hard for other people to understand. People think there's no law over there" in China, he said.

Dick Adams, 57, whom Zhou hired to be in charge of sales and marketing at GSP North America, said the company is proving to employees, the community and the state of South Carolina that they are "good Chinese."

When Zhou took over, he initially operated the factory Chinese-style, 24 hours a day -- with a day shift and a graveyard shift. But the workers complained about working in the middle of the night, so now the factory just keeps regular daytime hours.

"You have Chinese that come in here and just want to take, take, take and not give anything. They'll come in here just to get an order and run away. GSP hasn't done that. They have come and invested millions of dollars in buildings and people and distribution," Adams said.

Researcher Wu Meng and staff writer Michael Fletcher in Washington contributed to this report.

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