California Becoming a Favorite Chinese Investment

When Hong Kong returns to Chinese control this week, the West will be focusing on how China will integrate its wealthy new territory. But the issues associated with the transfer of the British colony--the future of Hong Kong’s autonomy, democracy and civil liberties--have drawn attention to shifting patterns of Chinese investment worldwide. Increasingly, the Chinese, both on the mainland and across the diaspora, are gazing at America’s Pacific shores.

The growing Chinese interest in the United States--and, in particular, Greater Los Angeles--has many sources, political and economic. “This is the safe haven in case they have to escape,” says Henry Hwang, whose L.A.-based Far East National Bank was recently bought by Taipei’s Bank Sino-pac.

Although the bulk of the investment goes through Hong Kong or Singapore, the two Chinese financial capitals, insiders report the latest surge in capital outflows did not originate with Hong Kong investors, who have had 13 years to find their “safe havens.” Instead, the big money passing through intermediaries is coming from people who traditionally invested in places--Taiwan, Indonesia, Thailand and Mainland China--where political, even economic threats now jeopardize long-term prosperity.

Last year, for example, China’s naval and air-force exercises in the Taiwan Strait sparked concern in Taiwan about the island’s long-term viability; capital outflows subsequently increased. Indonesia’s Chinese, though only 3% of the population, control 110 of that country’s 140 leading business conglomerates.They have been watching nervously as the granite-like stability of Suharto’s regime begins to crack. The rise of populist and Islamic sentiment, which appeal to the traditionally anti-Chinese pribumi majority, worries the Chinese community, which well remembers the pogroms that accompanied the archipelago’s last political upheaval 30 years ago.

Economic forces, notably a slowdown in growth rates, albeit from high and possibly unsustainable levels, are also leading some Chinese capitalists to seek opportunities outside Asia. A rash of speculation has created office-building gluts in Bangkok, Jakarta, Beijing and Shanghai; as a result, many Chinese investors are holding properties burdened by rising vacancy rates or, in some cases, in risk of default. Thailand’s economic growth rate is half what it was in 1995, partly because of sagging exports; the country’s stock market has declined nearly 50% since January, and interest rates have soared to as high as 20%.

Similiar problems are reaching China proper. New investment in China, for the first time in a decade, is expected to fall from $42 billion in 1996 to about $30 billion this year. A recent Economist magazine survey of multinational investors in China found that more than half of them were weary of doing business in a “socialist market economy” controlled by an increasingly corrupt and often highly arbitrary Communist Party elite.

Accordingly, U.S. banks, hotels, factories, industrial parks and high-rise towers are ever more appealing to Chinese investors. And the Chinese have the financial wherewithal to buy such properties, often with cash. “The flows coming here are not only steady--they are getting bigger and bigger because the wealth keeps growing so rapidly in places like Taiwan, Singapore, Thailand and Malaysia,” says Dominic Ng, president of San Marino-based East West Bank, which has close financial ties with Indonesian Chinese.

Recent statistics on foreign-currency reserves confirm Ng’s assertion. Combined, Taiwan’s and Singapore’s reserves total more than $150 billion, twice those of the United States and greater than the sum of Germany’s, France’s and Italy’s. China’s total $114 billion, up $30 billion in the past year alone; its new territory of Hong Kong adds an additional $70 billion in reserves. Only Japan possesses anything like the ready cash that can be summoned by the Chinese.

But the Japanese are not buying much beyond Treasury bonds and equities. In contrast, investment abroad by Chinese-dominated Asia has been rising at an almost 40% annual clip; since 1993, according to a new study by Kenneth Leventhal/Ernst & Young, more than $6.2 billion in new real-estate investments outside Asia have been made by non-Japanese Asian investors, mostly Chinese.

To a large extent, the investment flows follow the Chinese diaspora. California, with 40% of the nation’s 2 million Chinese, leads with roughly 24% of the total investment. New York State, which has the nation’s second-largest community, received 16% of the investments identified by Leventhal, much of them going to Manhattan and the Asian enclave at Flushing, Queens. Texas, with the third-largest diaspora population, received 11%, with most going to Houston, now a major center of Chinese business.

Jack Rodman, who supervises Leventhal’s Asian investment survey, says this activity may represent just a fraction of the diaspora investments, most of which are funneled through hard-to-track family enterprises. Money flowing into places like the San Gabriel Valley, for example, is not separated out in the Leventhal studies. “It’s kind of like tracking great Mafia families,” Rodman jokes. “They are everywhere in and around China. No one has heard of most of these people.”

The familial nature of Chinese investment makes their presence different in nature from that of the Japanese. When the Japanese were buying up Rockefeller Center, movie studios and much of downtown Los Angeles, they were pursuing the investment strategies of huge, highly sophisticated business enterprises. Although pride, even arrogance may have motivated some of these purchases, the overriding interest was economic.

In contrast, the Chinese are both investing and, increasingly, settling in the United States. California, in particular, has become the promised land. As many as 90% of Chinese immigrants, contends Marty Shih, who surveys Chinese American opinion at his El Monte-based Asian American Survey Center, come to make money and live.

In the next decade, the growth of this immigrant Chinese community will greatly increase the intimacy among China, the Chinese diaspora and California. With a quarter of a million students attending U.S. universities since the mid-1980s, the Chinese have already attained high positions at top academic, high-tech and scientific institutions. This is especially true in California. In San Francisco, the oldest major Chinese settlement on the North American mainland, the economic impact of new Chinese money long ago broke out of its traditional Grant Avenue community. Today, Chinese economic influence extends from the Richmond District in western San Francisco to Berkeley and southward through such Silicon Valley towns as Mountain View.

Greater Los Angeles, with the largest Chinese community in North America, lies at the epicenter of this economic, political and social integration. As Southern California’s economy continues to rebound, the Chinese, both domestically and globally, are proving to be the region’s most aggressive players. Investors and entrepreneurs are picking up assets at discounts of as great as 50% of previous purchase price.

Among these properties are several downtown L.A. office towers and a clutch of hotels, including the Biltmore, the Bonaventure, the Beverly Wilshire and the Hiltons at Universal City and LAX. In what may be a harbinger of things to come, the Intercontinental downtown was bought this year by Beijing-based Honggao International Group, one of the mainland’s rising conglomerates.

But the Chinese impact extends far beyond office buildings and hotels. Large swaths of Los Angeles County--from San Marino and the San Gabriel Valley to Cerritos--have had their economies transformed by Chinese capitalists who have spearheaded much of Southern California’s industrial resurgence, ranging from the computer makers in the San Gabriel Valley and Orange County to companies in the textile, garment and other “soft goods” industries.

Asians have also been the leading force behind the expansion of the wholesale-trade business for toys, fish, fruits and vegetables, one of the few bright spots in the otherwise gloomy downtown business scene. With Southern California’s commerce with China up 300% since 1991, China now stands as our second-largest overseas trading partner, after Japan. These expanding trade activities have, added nearly 100,000 jobs in the L.A. Basin since 1990.

In the long term, the Chinese contribution may be greatest in the financial sector. With its own home-town large banks now gone, Los Angeles’ economy increasingly depends on its network of 30 Chinese-owned banks for business and trade finance. East-West Bank, once an obscure San Marino institution with Indonesia connections, has grown into the Southland’s fourth-largest commercial bank. It and other banks have become powerful conduits for Asian capital critical to the rebuilding of the local economy.

How California handles the issues raised by its growing ties with China and the Chinese may prove to be among the most critical determinants of the state’s future course. It involves more than matters of morality, global geopolitics or “fair trade,” the usual perspectives in discussions about U.S.-China relations. For at the heart of the evolving California-China connections is the question of survival. With China about to become a prime shaper of the world’s economy, how California positions itself in the Chinese “sphere of influence” may well determine whether it will remain a global player in the 21st century.