China Threatens U.S. Economic Supremacy
R&D spending, overseas investments & financing on the rise, while U.S. contracts
By The Curmudgeon
Is China becoming what Japan was in the mid to late 1980's, i.e China Inc? China is
increasing R&D spending, while it's declining in the U.S. and Europe.
The country has stepped up its pace of overseas acquisitions, while
financing big projects in the U.S. that domestic banks and financial
institutions won't touch. Let's examine all three of these important
1. R & D Spending: Declining in U.S. but increasing in China
The WSJ reports that Research-and-Development (R&D) spending by governments and corporations in Europe and the U.S. is expected to decline in 2013, reflecting sluggish economies and large national debts, according to a new forecast. U.S. inflation-adjusted R&D spending is expected to decline 0.7% next year, according to the Battelle Memorial Institute. The forecast assumes that lawmakers will resolve the looming "fiscal cliff" problem, which could trigger spending cuts and tax increases early next year. Without a resolution, R&D spending would drop even more sharply.
Inflation-adjusted R&D spending growth in the U.S. averaged about 4% a year from 2004 to 2007 in the U.S. But since 2009, growth has failed to outrun inflation.
But wait.....China, the biggest economic rival of the U.S., has increased R&D at a much faster pace! China's R&D spending could increase 11.6% next year, according to this article.
2. China buying out U.S. companies
Last week, it was widely reported that China was on a spending spree looking for U.S. companies to buy out, take over or merge with. The value of these deals, once uncommon, hit a new high this year, according to data from Dealogic. So far in 2012, Chinese investors have spent $10.5 billion acquiring American companies, topping the previous annual record of $8.9 billion in 2007.
80% of AIG's aircraft leasing business unit was sold to Chinese investors for $4.2 billion. Chinese auto parts maker Wanxiang Group paid $256.6 million for A123 systems, a one-time darling of the U.S. electric car industry. Earlier this year, Dalian Wanda bought cinema chain AMC for $2.6 billion according to this article.
The NY Times reported
that the amount of dollars Chinese companies have spent on overseas
acquisitions has jumped 28% this year,
versus the same period in 2011, according to Thomson Reuters data.
That compares with a 2.8 percent slump in
global merger and acquisition volume over all.
3. China Development Bank finances projects U.S. institutions won't
A group of U.S. developers is planning the biggest real-estate expansion in San Francisco, CA since the 1906 earthquake. One would assume they're getting the financing from a U.S. bank. Wrong! $1.7 billion to finance this project is coming from the China Development Bank (CDB), a policy arm of the Chinese government, which backs undertakings from low-income housing to the Three Gorges Dam.
A person familiar
with this deal said that American pension funds and banks simply weren't
prepared to make such a large loan as the one made by the Chinese. U.S.
companies have largely ditched investment in real projects for share buybacks
and other forms of shareholder benefits. "If you can't attract
domestic sources of funding for deals that are this attractive, then when can
you? It's kind of a crime you've got to go to China," said the person
All this Chinese investment and financing is coming at a time when the U.S. and Europe are very concerned about stepped up Chinese government corporate espionage, warning domestic companies not to do business with Huawei and ZTE who are believed to be controlled (or at least influenced by) the Chinese government.
The CURMUDGEON sees these actions as a
direct threat to U.S. global economic leadership and innovation in the
technologies the Chinese are investing in. We attribute this U.S.
retrenchment to a hangover from the 2008 financial crisis and the reluctance of
U.S. companies to increase R&D and other capital spending on plant or
equipment. Uncertainty in Washington regarding fiscal policy and taxes
is another impediment to taking a longer term view of corporate investments.
This is not good news for America!
Till next time,
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.