Chinese firm Shanghui is now seeking to purchase American food giant Smithfield Foods, Inc. (NYSE:SFD) in a 4.72 billion dollar deal. This would mark the largest ever acquisition of a U.S. company, and while on the whole the investment is actually quite small, it points to an increasing trend of rising Chinese investments. Rich with cash from a surging economy many Chinese firms are now looking to diversify. Will increased Chinese investments prove to be a win-win for China and the United States, or could one party actually lose out in the deals?
Chinese Investments are Growing
While Chinese investments are growing, totals are still quite low. Rhodium estimates that Chinese firms and investment vehicles have invested some 23 billion dollars, with most of the investment coming in the last few years. While this sum might sound large, it is only a tiny fraction of the 2.5 trillion dollars in accumulated direct investment (according to the CIA World Factbook). In fact, China is actually more heavily invested in Australia, though much of the investments are in minerals and natural resources. So far in the United States most investments have been in either the finance or natural resources sectors.
The Smithfield Foods, Inc. (NYSE:SFD) deal must first gain approval from the secretive U.S. Committee on Foreign Investment, but it is unlikely to face any trouble from the Committee. The Committee is set up specifically to monitor and protect national security and it would be hard to argue that the sale of a “pork” company presents any real threat to national security. Still, members of the public, various political pundits, and even some members of Congress are raising concerns over the trade deal. Many people seem to believe that this deal points to an impending takeover of U.S. companies and real estate.
While Americans might be worried about growing Chinese investments, it is also important to note that such investments could encourage economic growth. In fact, American states and cities are working hard to entice Chinese companies to open up operations in the United States. With labor costs and environmental regulations increasing in China, the United States, which is China’s largest single destination for exports, is becoming a more attractive investment location. As with Japanese firms, which have relocated large portions of their businesses to the United States, many Chinese firms are coming to realize that it often makes sense to move closer to the U.S. domestic market.
Still, the United States may want to be careful and scrutinize certain investments. State-owned Chinese companies have been rapidly purchasing utility companies and other essential components of national infrastructures around the world, including in Australia. These types of investments could present national security dilemmas, especially important at a time of rising cyber security issues and increased tensions in the South China Sea. The United States would be wise to restrict investments in sectors and industries that are vital to U.S. national security.
In many cases, Chinese companies will benefit more from talent and technology acquisitions than anything else. With China set to quickly become the world’s largest consumer market. and with Chinese firms already enjoying widespread access to American consumers, Chinese companies stand to gain limited gains from direct access to American markets. Still, Shanghui can use the Smithfield Foods, Inc. (NYSE:SFD) acquisition to spur a complete modernization of its domestic operations.