Shale gas revolution triggers FDI boom for US

FT front-page story on shale gas boom in US already identifiably responsible for additional $90b foreign direct investment flow into US.

Subtitles are telling:

• Investments drive US industrial renaissance
• European companies fear growing divide

Industries that benefit from cheap feedstocks are being targeted, and European counterparts fear they will be at systematic disadvantage in any industry that is fuel-intensive.

Yes, some of these same industries in US argue now for no LNG exports, lest the advantage slip away.  But most energy experts say we can export at will and probably raise the MMBTU price by maybe only one dollar.  We are now about 8-10$ cheaper than LNG prices in Europe and about $15 less than what Asians (mostly the Japanese) are paying.

So yeah, we can have our cake and eat it too.

Forever? 

No, but arguably for a solid generation's time.

So much for "peak oil" determining all.

The irony: as America executes "strategic pivot" to contain Chinese military, the US economy continues to open up to Chinese FDI

FT p. 1 story: "US opens up to Chinese takeovers with record figures for M&A deals."

Almost $8b of deals announced so far for this year.  Biggest is Dalian Wanda buying my favorite movie theater chain from my college years - AMC Entertainment.  Next is a Sinopec purchase of a stake in Devon Energy.

Best year of Chinese FDI to date is $8.9b, so 2012 likely to set new record.

Why this matters: the more China buys into the US economy, the harder it gets for Washington to treat it as the military "other," because stakeholders accumulate inside the US - in addition to all those who export to China.  All these jobs add up.

Where China and the US are clearly collaborating

Nifty WSJ full-page report in mid-June entitled, "Beneath a war of words, money paints a different China-U.S. picture."  The subject?  Chinese investments in US renewable energy efforts.

Just like in the case of hydraulic fracking, we see the Chinese eager to collaborate.

Naturally, as the less advanced technology economy, the Chinese are eager to go beyond collaboration into . . . ahem . . . aggressive collaboration, let's say.  But let's be honest: that's the incentive for the less-technologically gifted party in any technological investment. For the more advanced party, the goal is an expanded pool of opportunity over time:

Read the headlines and you find a war of words between the U.S. and China over clean energy, with the two countries trading barbs over whether Chinese solar-panel makers are dumping their wares onto the U.S. market at prices so low they're illegal. Follow the money more broadly, however, and you see something different: clean-energy investors and executives from the two countries starting to do deals.

Chinese businesses, typically with Beijing's support, are beginning to buy stakes in U.S. clean-energy companies and projects, often with Washington cheering. The deals span technologies from cleaner ways to burn coal to cheaper ways to use renewable power.

Each side has reasons to expand this capital flow. The Americans get the Chinese money and, with it, access to China's vast market, which is far hungrier for clean-energy innovation than the U.S. The Chinese get U.S. technology to help sate their soaring energy demand, and a place to invest that looks positively low-risk compared with their home turf.

As for the fears? Money talks - no matter the language.

One reason is economic. Federal stimulus money for the energy industry is tapering off, and other federal clean-energy subsidies, many of which failed to deliver enough bang for the buck, are likely to get pared back, too. More than ever, U.S. clean-energy companies could use the help of China's investors and consumers.

Another reason is environmental. Many clean-energy technologies are getting cheaper but are still too expensive to compete against conventional fossil fuels. The only way they stand much chance of gaining real scale is if the world develops and deploys them in the most economically efficient way: across national borders. Moreover, if American clean-energy technologies aren't deployed in China, where air pollution is thick and greenhouse-gas emissions are rising, then whatever cleanup those technologies accomplish on U.S. soil won't much matter.

Thank God for the logic of businesspeople.  Imagine if the Pentagon could aspire to such thinking.

Hopeful sign of a sustained Africa take-off?

WSJ story on how Africans are starting to invest in Africa in a big way.  We're talking FDI, or foreign direct invesment that crosses borders and, in contrast to stock markets, represents "sticky money" in that it involves investment "directly" into assets.

Historically, when a region takes off, it's local money followed by extra-regional money in terms of sequencing. Same holds with panics: local money freaks first, triggering same with extra-regional.

Afric is different, because so much of its wealth, once captured by its elites, has gone abroad (I've seen estimates as high as 40%).  Word has been that a good portion of that money is now coming back to take advantage of things.

But this story is about big commercial entities across Africa getting more into cross-border investments, which is incredibly positive. I have run into a certain amount of this in my own dealings on the continent, with tiny Mauritius playing the Singapore role.

What the charts show:  Although the financial panic of late 2008 didn't make a dent, because Africa's financial connectivity (hence exposure) is limited, the slow down does eventually impact extra-Africa FDI: big Western markets slow and that slows Asian exports and that slows FDI into Africa generally because the continent is first and foremost a raw materials supplier.

But the good news of the piece: Africans themselves have picked up a decent portion of the slack, which is quite encouraging.

Total self-sustainable liftoff?  Hardly.  Africa's great hope of the past few years is that rising Asia (and other developing risers) might provide a sustained demand for materials that the West, in its more isolated boom-and-bust cycles of the Cold War, ever could.

Some concern there as we all now watch China slow down - inevitably - as it moves from extensive (at least along the coast) to intensive growth.  The hidden hope there?  China goes intensive along the coast and keeps taking advantage of extensive growth in the interior.

Time's Battleland: CHINA | The Perfectly Ironic Chinese Foreign Direct Investment

Tuesday’s Wall Street Journal story of how Chinese state bank (China Development Bank) is pumping $1.7 billion into two long-stalled redevelopment projects in the San Francisco Bay area – namely, Hunter’s Point (a Navy base until 1974) and Treasure Island (same until 1996) — is worth noting.

Read the entire post at Time's Battleland blog.

Here comes Chinese FDI in a very public way

This NYT story today really jumped out at me, and the Chinese just bought, in a signature Foreign Direct Investment move, the second-biggest movie chain in the US:  

The Wanda Group, a Chinese conglomerate with extensive interests in the entertainment business, has agreed to acquire AMC Entertainment, North America’s second-largest movie theater owner, in a deal that is valued at $2.6 billion, including roughly $2 billion in assumed debt, the companies said Sunday.

Enlarge This Image

David Gray/Reuters

Gerardo I. Lopez, AMC’s chief executive, left, exchanged documents with Zhang Lin, vice president of the Wanda Group, during a ceremony in Beijing on Monday.

The acquisition creates the world’s largest theater group, the companies said. It also represents a significant expansion of Chinese influence in the American film industry. The industry has been looking to China for a vast new reservoir of ticket buyers for Hollywood movies, while joining Chinese investors to produce films like the planned “Iron Man 3” and teaming up to build studio facilities and a new Disney theme park in China.

The usual motives apply:  Chinese firm looking for know-how in an industry that's booming across China but isn't being as monetized as it could be - by Western standards.  For the US company, a crucial sub-plot emerges a few paras down the story:

In addition to the $2.6 billion value assigned to AMC’s debt and equity in the deal, Wanda is expected to invest $500 million for what the companies called “strategic and operating initiatives.” Mr. Wang said that the money would generally be used for renovation and other needs, but that specifics were up to Mr. Lopez and his team. Mr. Lopez said there was no plan in place for the money. But, he said, it might be used to retire debt, acquire new theaters or fix up old ones.

To me, this is a very positive development, and it's one we're going to read about countless times over the next decade. And yes, it will look and feel like Japanese money "buying up everything!" across America in the late 1980s/early 1990s.

But, of course, America has "suffered" these invading waves of FDI throughout our long history as a multinational economic union.  Chinese money will be just as good and useful as those of the other countries that preceeded it, and the further intertwinning of our economies will mitigate the craziness out of the Beltway crowd as they pine for a "near peer" competitor to justify the dropping floor of the defense budget.

You know, the Chinese were going to be the featured villain in the remake of "Red Dawn," but then Hollywood realized they'd be shutting themselves out of the Chinese box office, so they subbed in the North Koreans, which - of course - makes the film a complete and utter fantasy.  But it just goes to show you what all this financial connectivity leads too - cooler heads prevailing everywhere save among those fiercely dedicated fear-mongers in DC.

Chart of the Day: China's capital stock compared

From the Economist, with arguments not exactly settled by the comparison.

Reality/fear is that too much of China's growth is via capital investment. Compared to other economies, that part seems undeniable.  But like with India, we're talking continental-sized economies where hundreds of millions of rural poor are still left behind, so investment is clearly in order for a very long time.

The per capita comparison, however, shows how China remains a poor country by modern standards.

Another interesting tidbit:

China's rising investment and falling consumption as a share of GDP are commonly portrayed as an economic anomaly. Yet this pattern is normal in a rapidly industrializing country. In a traditional agricultural economy farmers consume most of their income, but once industrialisation gets under way a rising share of national income goes to owners of capital, who invest it in factories and the like. Investment rises as a share of GDP, and consumption falls. During their peak periods of industrialisation, South Korea and Japan saw an even sharper rise in investment relative to GDP than China has seen over the past 20 years.

You can call this the glass-half-full argument on China's long-term growth, and it's just as true or no more false than the half-empty variant:  coastal China must shift from extensive to intensive growth, and there the labor crunch and demographic aging will force evolutions very similar to a developed economy.  But interior China is another whole economy ready to take off - again - like China Coastal has for 2-3 decades. Of course, not being coastal will make this a far harder task in terms of attracting FDI and the manufacturing it enables.

But that just speaks to a certain economic slowdown that is inevitable.  We have a strong West Germany economy (Coastal China) being forced to bring along/accommodate/prioritize somewhat an East Germany (interior China).  Coastal China/Beijing will do this for political stability reasons, but slow down the overall economy it will - even as it assured plenty of long-term growth and development (all that urbanization, for example).

Ah, the complexity of modern China.

WPR's The New Rules: U.S. Needs Chinese Partners in Asian Century

While America has begun an economic recovery of uncertain strength and staying power, we Americans nonetheless face a far longer-term and more substantial national rebuilding project. This daunting task has placed us in a contemplative space, in which we nervously toggle between bouts of renewed self-confidence and crippling self-doubt. But the same thread runs through both cycles of this national bipolar disorder: the assumption that we must bear this burden alone.

Read the entire column at World Poliics Review.

Obama says US wants Chinese FDI, but East Asia needs AirSea Battle Concept too!

What's wrong with this picture?  It comes from a WAPO article that says China is still wary of putting FDI in US, even though Obama claims he wants it for job creation.

Hmmmm.

Where to begin?

AirSea Battle Concept?

New national security strategic guidance that says US military force-sizing should be toward high-end warfare requirement in East Asia - namely China specifically?

Gosh, you wonder where the Chinese feel like we let national security fears trump economic opportunities.

I mean, shouldn't we be able to take their money AND target them for great-power war down the road?  What's so weird about that?  According to Kagan, everything you need to know about China and America is told in the fable about the frog and the scorpion.

This is not the world America made; these are merely the fears we prefer over change - and it's fairly pathetic.

Wikistrat's "The World According to Tom Barnett" 2011 brief, Part 3 (Flow of Money)

This section of the brief focuses on the rise of the global middle class, the evolution of national economies, why China won't "rule the world" for all that long, and what the future evolution of East Asia holds.

Time's Battleland: Think outside the defense budget: the real cost of keeping China our enemy

Mark Thompson picks up on Chins's cheeky advice to visiting Chairman of the Joint Chiefs Admiral Mike Mullen regarding our coupling of world-class defense spending with our world-class national debt/faltering economy.  We can brush it aside, of course, seeing that it's coming from our #1 excuse for defense spending (Mustn't let those Chinese . . . ).

Read the entire post at Time's Battleland.

The other two charts described in the post:

The Kevin Bacons of emerging markets: still HK and Singapore

chart from here

Played this game in one of my NewRuleSets.Project "economic security exercises" (sorry, but I haven't yet reconstructed those pages on the new site--soon!) atop World Trade Center 1 back in 2001 with Asia, using the example of the Kevin Bacon game.   The KBG says you can link anyone in the world to Kevin Bacon in six steps or less (six degrees of separation notion I demonstrated in Great Powers (between me and John Adams--as in me to my grandpa to TR to John Hay to Abe Lincoln to John Quincy Adams to John Adams).  The chart above links Indiana U alumni to Bacon in five steps.  

We presented all the players with a list of every emerging market in Asia and then had them rank-order their top picks for desirable free-trade agreement groupings from the perspective of the US, EU and Japan.  The winner, or most often top ranked, was Singapore.  All three sides wanted it in any FTA they could access.  On that basis, we dubbed Singapore the Kevin Bacon of foreign direct investment in Asia, meaning you wanted to put your money there because it presented the tightest possible financial connectivity to the most amount of regional emerging markets.

Now, in our exercise, we didn't break HK out from China, something we skipped in deference to several prospective Chinese guests at the request of Cantor Fitzgerald.  In the end, they didn't show up anyway because their visas were rejected (right after the EP-3 spy plane incident).  It was a bad choice on my part to give in on that, because virtually all of our players told me later that Hong Kong would have been right up their with Singapore for the same reasons--a highly desirable third-party on any investment deal because they brought local knowledge and the best local rules.

Anyway, check out the tables from a recent FT full-pager on emerging markets:

China is clearly the biggest overall magnet/deal-maker, but note the high numbers of deals for HK and Singapore--way out of proportion to their size.  That's because they're supreme pass-through FDI conduits, both into and out of Asia.

That's why, whenever I hear of small states in the PG or around Africa (like Mauritius) expressing the ambition to position themselves as the next Singapore or Hong Kong, I spot a player that's looking to get in front of a big money flow--like Asia into Africa.

In fact, that's one of my mantras shared with Steve DeAngelis:  whatever the globalization trend, you want to "get in front of the money"!

China will only go deeper into Africa, staying for the very long haul

Pic here

Couple of FTs and a WSJ story on China defending itself from critics.

China does the usual oil-for-infrastructure implied swap in Nigeria:

China has agreed to spend up to $23bn (€19bn, £16bn) to build oil refineries and other petroleum infrastructure in Nigeria, potentially strengthening its hand in the country as it seeks to secure 6bn barrels of crude reserves.

Emmanuel Egbogah, special adviser to the president of Nigeria on petroleum matters, told the Financial Times that China State Construction Engineering Corporation signed a memorandum of understanding on Thursday.

In spite of being Africa’s leading energy producer, Nigeria imports almost all its fuel – and pays a subsidy equivalent to its entire annual capital spending – because existing refineries are in disrepair.

Crude but sweet.

The fund, China Africa Development Fund, is supposed to have a bunch of deals in the pipeline and an initial $5B to spend.

China also announces its largest investment into South Africa, "entrenching its position as the resource-rich continent's most important economic and commercial partner.  China is now South Africa's single biggest trade partner.

No doubt about that, and it is overwhelmingly to the good.

So naturally China bristles at criticism from outside observers, although it will need to grow ever more sensitive to such criticism growing within Africa.

As J.R. Wu notes in the WSJ piece:

... concerns persist that China is preying on the continent's resources to feed China's economy, while contributing little.

Beijing has put in place some mechanism to deal with issues surrounding its investment and trade on the resource-rich continent, and has asserted that its presence in Africa is increasingly being shaped by nongovernment forces.

Meaning more laws and protections must be put into place, says China's vice commerce minister.

China has set up joint government commissions to work these issues in 43 African countries.  Trade now sits around $100B a year, and is expected to skyrocket in coming years.

As a globalization expert and soon-to-be father of both Chinese and African daughters, my fascination with this process knows no bounds.  I have, in the past, vastly underestimated the potential for China to positively alter Africa's development trajectory.