Investors to seek bridge over troubled waters

A floating dock, built by Shanghai Zhenhua Heavy Industries Co Ltd for a United States company, is ready for delivery at Qidong, Jiangsu province. Xu Congjun / For China Daily

Ambassador Max Baucus' mission to upgrade business ties between the two largest economies has rivers to cross

The United States' new ambassador to China came to Beijing with the idea of bolstering business ties between the world's two largest economies. Like his predecessors, he decided that, compared with the choppy waters of politics and security, business is one area where Beijing and Washington can find common ground.

Which is why Max Baucus kicked off his first investment forum with a "hard sell": Uncle Sam wants Chinese investment to help rebuild the US.

"America really needs to repair its infrastructure," Baucus told a recent forum that brought together 130 Chinese and US corporate executives and investment advisers. "The roads, the highways, bridges and airports need repair, and need to be rebuilt, in many cases. Frankly, that means there is a huge opportunity."

Chinese experts in the outbound investment field, however, cautioned that the very elements the ambassador wants to downplay - the political and security factors - may determine whether the ambassador's dream becomes reality.

"The largest obstacle for Chinese investment in US infrastructure is the US' deep-rooted distrust toward the Chinese government and companies, not only the State-owned enterprises but also private firms," said Xu Hongcai, a researcher with the China Center for International Economic Exchanges. Together with the US Chamber of Commerce, the think tank hosted the US-China CEO and Former Senior Officials' Dialogue.

Xu said that although the dialogue has entered its sixth year, he and his colleagues still have found it frustrating to build trust.

That distrust is embodied by the Committee on Foreign Investment in the US, or CFIUS, a constant source of anxiety for many Chinese companies aspiring to invest in the US. CFIUS has a mandate to conduct a national security review on any investment that gives a Chinese entity "control" of an existing US business.

CFIUS investigations led Huawei Technologies Co Ltd, the Chinese telecommunications equipment giant, to withdraw from a $2.2 billion deal in 2007 to take over US networking equipment maker 3Com Corp and the $2 million purchase of technology from 3Leaf Systems Inc in 2010.

In 2005, an $18.5 billion bid by China National Offshore Oil Corp for Unocal Corp failed over congressional opposition before it even had a chance to undergo a CFIUS review.

US officials and experts claim that China is preoccupied by the failure of a few high-profile cases.

"CFIUS is not nearly the problem that some people think," Baucus said. "I know that politically, sometimes it's used. But we have to cut through the politics and get down to the economics, and I can tell you it is not an issue."

He repeated the assurance made previously by many US officials that most foreign investments do not go to CFIUS, and those that do represent only a very small percentage of all cases.

Mark Plotkin, partner with law firm Covington & Burling LLP, said foreign companies take a controlling stake in approximately 1,500 US companies a year. Of those, around 150 are reviewed by CFIUS, with only a few being rejected.

US officials stressed that its infrastructure sector promises abundant opportunities, and they welcome China's participation, whether through financial investment or providing goods and services.

A report commissioned by USCC and completed by Covington and other firms, said at least $8 trillion in new investment will likely be needed in US transportation, energy and wastewater, and drinking water infrastructure from 2013 through 2030, totaling some $455 billion a year.

Energy represents the largest opportunity at $4.64 trillion, or 57 percent of the total, followed by transportation (36 percent) and water (7 percent).

But so far, Chinese investment in these sectors has been quite limited, despite the fact that Chinese engineering and construction companies have prevailed in Asia, Africa and Latin America. Of the $137 billion in overseas contracts China got in 2013, more than 90 percent were from Asia, Africa, Latin America, while less than 1 percent was from the US, according to data from the Ministry of Commerce Ministry.

There are good reasons for that. Aside from the unfriendly environment perceived by Chinese companies, they are - particularly in the engineering sector - hampered by quality concerns, specific procurement requirements and after-sale issues.

The report by USCC estimated that China's participation as a vendor is "primarily cost-based". That means that when quality concerns outweigh price concerns, Chinese firms are less likely to get a deal.

For example, in 2006, Shanghai Zhenhua Heavy Industries Co Ltd, a port crane manufacturer, successfully bid on parts of the new San Francisco-Oakland Bay Bridge project. At first it was an unlikely candidate by many standards. But as it was at a time of fiscal austerity for California, and the state's procurement focused on reducing cost, Shanghai Zhenhua stood out for its competitive pricing - $400 million was saved, according to California officials.

Local procurement preferences also pose an obstacle for Chinese companies, which are usually good at lump-sum contracting, from engineering to procurement to construction. Xing Houyuan, vice-president of the Chinese Academy of International Trade and Economic Cooperation, said that in the US, chief contractors have to subcontract many parts of a project to local companies and concentrate on contract managing, which greatly undercuts Chinese companies' competitiveness.

The difficulty for Chinese companies to provide after-sales service is another impediment. With respect to quality control, there are concerns that the current US-China legal cooperation may make it more difficult to hold Chinese vendors liable for any damage caused by a faulty product.

Despite all the technical gaps, Xing said Chinese enterprises have great enthusiasm for investing in US infrastructure, driven by a desire to diversify their asset portfolios and boost their brand recognition by completing deals in a developed economy.

Jeremie Waterman, the USCC's executive director for Greater China, said improving two-way infrastructure investment "will not happen overnight", but that the potential benefits arising from such growth are substantial enough to warrant patience and diligent efforts from the private and public sectors in both China and the US.