Chinese Firms’ U.S. Advantage

Chinese companies are doing more business and investing more in the United States than ever before.

But there is mounting concern that the secretive nature of Chinese companies operating in the United States and their close ties to the communist government provide unfair competitive advantages that threaten American corporations and national security.

In one high-profile case, the fashion maker Gucci is seeking counterfeiters’ records held at the Chinese state-owned Bank of China, which is operating in the United States. A judge ordered the Bank of China to turn over the records, but it has refused, saying compliance would put it in violation of Chinese bank secrecy laws.

The Gucci case is just the tip of the iceberg. The U.S.-China Economic and Security Review Commission in May warned that this practice of hiding behind the veil of Chinese law is becoming more widespread.

“Chinese financial institutions can effectively operate behind a firewall that keeps them largely immune from the jurisdiction of U.S. courts and regulatory agencies, leaving U.S. partners, competitors, and investors vulnerable,” it stated in a report.

Chinese firms have also been making inroads into other U.S. sectors like defense, real estate and technology. 

Chinese firms have also been making inroads into other U.S. sectors like defense, real estate and technology. The push is being spurred by a slowing economy at home and a Chinese government mandate to pursue growth opportunities abroad, resulting in a massive mergers and acquisitions spree by Chinese companies.

Seeking ways to dig themselves out of the most recent recession, many U.S. states have been receptive to Chinese investments to help create jobs and spur economic growth. The cumulative amount of foreign direct investment from China to the U.S. in the form of acquisitions and new projects grew from $3 billion in 2007 to $57 billion so far in 2015, according the Rhodium Group, which tracks foreign investment trends.

In 2013, Shuanghui acquired Virginia-based Smithfield Foods, the world’s largest pork producer, for $4.5 billion in the largest-ever Chinese purchase of a U.S. firm. Last year, another Chinese company purchased the Waldorf-Astoria hotel in New York City for $2 billion, and several Chinese firms were in hot pursuit of Starwood Hotels this fall before it was bought earlier this month by Marriott for $12.2 billion.

The encroachment of Chinese state-backed firms into the technology and defense spheres raises particular national security implications, especially considering China’s record of cyber espionage and intellectual property and trade secrets theft.

In 2012, two major Chinese telecommunications companies, Huawei and ZTE, were effectively barred from contracting with the U.S. government after the House Intelligence Committee accused them of being conduits for collecting and relaying sensitive information to the Chinese government that could be used in a potential cyberattack.

Currently, Tsinghua Unigroup Ltd., another state-owned company, is seeking to acquire Micron Technology Inc., an Idaho-based manufacturer that supplies computer chips to the U.S. military.

Because most Chinese companies that set up shop in the U.S. are owned or subsidized by the Chinese government, there are concerns they possess an unfair competitive advantage.

Its initial bid of $23 billion was rejected this summer for fear that it would be blocked on national security grounds. But Tsinghua — armed with $1.6 billion in backing from the Chinese government and a mandate to build a global microchip and semiconductor empire — is reportedly back for another bite at the apple and going after Micron again.

Further, because most of the Chinese companies that set up shop in the United States are either owned or subsidized by the Chinese government, there are concerns they possess an unfair competitive advantage over U.S. firms in the U.S. market.

“The term ‘Chinese companies’ is very problematic because it implies that they are private-sector entities that are comparable to their U.S. counterparts,” said Alan Tonelson, an economist and author of the RealityChek blog. “Nothing could be further from the truth.”

Trying to overlay the Chinese “market Leninism” economic model on top of the U.S. free-market model, he said, is a recipe for disaster.

“It represents an import into the U.S. of values and practices that we have long considered completely alien and totally undesirable,” he said. “I think we can all agree that we need less crony capitalism.”