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China Investment In U.S. On Track For New High

Chinese investment in the U.S. is soaring to a record high this year, even as trade tensions heat up in an election year.

Complete Genomics (GNOM), an ailing Silicon Valley DNA sequencing firm, said Monday that it's agreed to be acquired by BGI-Shenzhen, the world's largest operator of DNA sequencing centers for $117.6 million. BGI wants to enter the U.S. market for research and medical DNA testing.

Even before a recent flurry of takeover deals, China's foreign direct investment in the U.S. hit $3.6 billion in the first half, a record for any six-month period, New York-based forecaster Rhodium Group says. Chinese FDI here is on track to top the record $5.7 billion set in 2010, says Rhodium research director Thilo Hanemann.

"China could be an important new source of investment for the U.S. economy, especially since global flows from other countries have slowed down significantly," he said, noting that European companies are hoarding cash amid the eurozone crisis.

The Chinese investment boom is a major shift from the last decade when political opposition here caused many Chinese companies to pull back or opt for low-profile stakes in U.S. businesses.

The jump is taking place as the U.S. and China exchange jabs on the trade front. The U.S. on Monday filed a new complaint against Chinese auto and auto-parts subsidies. Beijing quickly fired back with a complaint against U.S. duties on various Chinese exports. And some see the strong inflow of Chinese investments as a threat to U.S. competitiveness.

"This is a product of the huge trade deficit with China. The Chinese are printing money, they've acquired a huge amount of dollars and now they are buying up America," said Peter Morici, a former chief economist at the U.S. International Trade Commission and now a business professor at the University of Maryland.

Major Chinese U.S. investments since January include property entertainment group Dailian Wanda's $2.6 billion buy of U.S. movie theater chain AMC Entertainment. It's China's largest U.S. corporate takeover to date.

In April, big Chinese oil player Sinopec (SNP) was allowed to buy a one-third stake in five shale oil and gas fields from Ohio-based Devon Energy (DVN). In early August, Chinese auto parts Wanxiang Group said it's taking an 80% stake in U.S. battery maker A123 Systems. Wanxiang plans to pour up to $450 million in A123, which has plants in 14 states and employs nearly 5,700.

Chinese state oil giant CNOOC (CEO) is bidding to buy Canada's Nexen (NXY), with energy assets in U.S. Gulf waters, for $15.1 billion. Superior Aviation Beijing is seeking U.S. approval for a $1.8 billion purchase of civilian aircraft maker Hawker Beechcraft.

More M&As are in the works and it's no secret that many Chinese companies are lining up to come here.

What's changed? For one thing, a post-recession U.S. is in more need of Chinese investment than 2005 when Congress blocked CNOOC's $18.5 billion bid for California's Unocal on national security grounds. However, U.S. officials in 2010 did rebuff Huawei's bid for U.S. software 2Wire and Motorola's (GOOG) mobile networks unit amid concerns about the telecom giant's Chinese military ties.

The U.S. also faces pressure from China to make reciprocal market access moves as American companies look to boost their sales in China. U.S. officials backed more Chinese investment in American infrastructure projects at May's U.S.-China Strategic Economic Dialogue talks.

China believes the time is ripe for a major entry into America.

"For Chinese companies, the opportunity is now," said Alex Zhang, a partner at international law firm White & Case. "They see (assets) in the U.S. as relatively cheap." Zhang, who heads the firm's M&A practice in China, says many private-sector Chinese companies are poised to enter the U.S. market. This differs from earlier practice when Chinese leaders allowed big state-owned enterprises to lead the charge.

Beijing had kept a lid on Chinese buying of U.S. assets for fear of fanning anti-China sentiment. But regulators now seem less worried.

"The shift is pretty much policy driven," said Zhang. "The Chinese government is really encouraging Chinese companies to look at opportunities outside of China.

Chinese investors are also working smarter. Many have tapped high-powered lobbyists to pitch their projects to U.S. lawmakers and are raising their profiles with U.S. consumers with pricey TV ads here. This differs from 2005 when some used more abrasive tactics when faced with U.S. opposition.

Chinese companies, for their part, are keen on buying American companies to obtain foreign skills and brand names.

Rhodium says top Chinese M&A sectors in the U.S. this year are oil and gas, aerospace, banking, metals processing and plastics. Other areas of Chinese interest are life sciences and medical equipment.

Chinese tube maker Golden Dragon Copper, for example, began building a $100 million plant in Wilcox County, Ala., earlier this year. The Industrial and Commercial Bank of China and other partners also bought an 80% stake in the Hong Kong-based Bank of East Asia's U.S. unit for $140 million in May. The deal gives China's biggest bank its first beachhead in the U.S. market.

Zhang cautions that Chinese firms are still learning how to operate in the U.S. and that the "deal success rate is still not high.

Does Chinese investment here pose a threat to the U.S. economy? And who will ultimately benefit

"If the U.S. goes into a recession, the Chinese can use their money to buy up a considerable part of the U.S. economy and put themselves in a position where we can't resist them," said University of Maryland's Morici.

But Chinese investment also support jobs here. BGI's takeover deal to buy Complete Genomics came after the U.S. firm said in June that it was firing 55 employees and was mulling strategic options.

Hanemann notes that China still accounts for less than one-tenth of 1% of total foreign investment in the U.S. Foreign companies worldwide have invested a grand total of $2.5 trillion in the U.S. on a historical basis, after factors like annual flows and depreciation.

Hanemann also sees $1 trillion to $2 trillion in outbound investment from China to various parts of the world in the next 10 years.

"There is a huge potential to attract a significant share of this new investment to the U.S.," he said.

Zhang said, "Hopefully, it's going to be a win-win situation for both the U.S. and China. We have to see how this wave of Chinese investments is going to play out."