Chinese in U.S. Shape Economy

A century and a half after their forebears came looking for California gold, China’s poor are still coming to America hidden in dilapidated cargo ships. But they are far outnumbered by a new breed of mainland Chinese pioneer: investor, entrepreneur, student.

Spurred by China’s expanding wealth and links to the global economy, that nation’s emerging commercial sector is moving billions of dollars and thousands of people around the world--and into Southern California trading firms, timber acreage in the Pacific Northwest and hotels in downtown San Francisco and Los Angeles.

Of particular note is their presence in Silicon Valley, where U.S.-educated Chinese are launching their own companies and some of China’s most ambitious firms are opening research facilities to tap into the expanding pool of overseas Chinese talent and leading U.S. technology.

Compared with Europe and Japan, mainland China is still a small and barely visible player in the U.S. economy. Mainland investments in the United States are estimated at $3 billion out of the $22 billion the Chinese have spent overseas on assets such as Hong Kong skyscrapers, Southeast Asian factories and Latin American oil fields.

By comparison, Japan’s holdings in the United States are put at nearly $600 billion.

But China’s economic inroads here have been rapid, its potential influence in critical industries is vast and two-way trade is nearing $90 billion. And this poses a profound challenge for U.S. policymakers, who must decide if China’s commercial intertwining with America is to be encouraged and nurtured--or if it will make China a dangerous military threat.

In the last three years, a skyrocketing Chinese trade surplus with the United States and reports of espionage and efforts to influence presidential politics have riveted Washington’s attention.

Alarms have sounded among critics, such as U.S. Rep. Christopher Cox (R-Newport Beach), who fear that America’s commitment to unimpeded flows of people, money and products has left the nation vulnerable to security threats masquerading as legitimate business.

Entanglements Seen as Conflict Deterrent

A committee chaired by Cox released a controversial report earlier this year alleging that as many as 3,000 Chinese state-owned companies in the U.S. are fronts for China’s military.

But Jonathan Pollack, a China specialist at the Rand Corp. think tank in Santa Monica, argues that this deepening web of economic entanglements is a powerful--and increasingly irreversible--deterrent to conflict between the two proud nations. He characterizes it this way: “Maybe the best situation would be if some of our prized furniture is in each other’s house.”

Unlike the Japanese, whose early forays across the Pacific were led by Toyota Motor Corp.-sized businesses, the Chinese influx in America has been quiet, often anonymous. In addition to a soaring number of talented students from the mainland, it consists of hundreds of little-known state-owned firms and thousands of private ventures, often tiny.

“I don’t know if China has an entry strategy,” says George Koo, a Pacific Rim specialist in Deloitte & Touche’s San Jose office. “It’s a bit more trial and error.”

Already a significant source of economic vitality in Southern California communities such as Monterey Park, Diamond Bar and Rancho Cucamonga, these mainlanders, or daluren, remain largely invisible outsiders.

Chinese businesspeople here avoid the limelight and obscure their China ties to avoid anti-Chinese sentiment or--equally feared--censure from Beijing, which has been trying to crack down on the flight of capital overseas.

For all the talk of a fearsome Chinese invasion, many of the businesspeople have proved easy targets for financial charlatans and made major blunders on Wall Street--like countless immigrants in American history.

And their new notoriety is a reminder that they are caught between two superpowers at a time when world economies and political alliances are adjusting to a technology-intensive post-Cold War world.

‘Like an Egg Between Two Big Plates’

“The Chinese in America are like an egg between two big plates,” says John Chen, president of a large lighting firm in Rancho Cucamonga.

Chen, a former Chinese government bureaucrat, is in many ways typical of the newest wave of mainland Chinese businesspeople--although his willingness to speak on the record is unusual.

After returning home from a U.S. posting in 1988, he decided to quit his government job. Chen made money importing used cars, then returned to the United States to go into business.

Three years ago, he and an American partner established the Savant Group, setting up a network of factories in China to manufacture residential lighting products. The firm’s annual sales have more than quadrupled to $10 million.

Chen, also co-founder of a mainland Chinese business group in Los Angeles whose 80 members represent $1.5 billion in annual sales, bristles at the accusation that his loyalty to China is a threat to his adopted homeland.

“We want to help China by bringing them American technology that is legal, and we want to help Americans get good products at a low price,” he says. “And we can make our fortune being the bridge.”

There is little question that Chen and other mainland Chinese are having an effect on the U.S. economy. But the efforts they go through to obscure their China ties make their presence here difficult for U.S. officials--and Beijing--to measure.

Although Chinese firms are supposed to get their government’s approval for overseas investments of more than $1 million, a thriving black market in foreign currency has allowed individuals to secretly move money out of the country.

And the more business Chinese do overseas, the easier it is to set up foreign bank accounts and build up dollar reserves that Beijing is unaware of.

Official U.S. and Chinese figures show mainland China’s holdings in the U.S. at less than $1 billion. But China experts agree that those numbers far understate the case because much of the money takes an underground route from China, usually through a third country.

James Zhan, an economist at the United Nations in Geneva, figures that 12% to 13% of China’s estimated $22 billion in foreign direct investments has gone into the U.S. economy.

It is the large state-owned firms--such as China International Trust & Investment Corp., or Citic, and China Ocean Shipping Co., or Cosco--that have attracted the most suspicion here.

China’s halting transition to a free market has created a hodgepodge of semiprivate entities with varying degrees of independence. That makes it difficult to distinguish public from private, giving rise to charges that the government is hiding behind a commercial facade.

Many Chinese firms claim to be private but are the profit-making arm of a government agency or the Chinese military, which produces everything from weapons to cigarettes. Or they’re publicly held companies whose major shareholder is the government.

Until the political spotlight brought these giant Chinese firms to America’s attention, they had operated here for more than a decade with little attention.

As China’s leading international investment arm, Citic entered the U.S. in the early 1980s and forged partnerships with Wall Street investment banks seeking China’s business. Some of them helped the Chinese raise money for mammoth infrastructure projects; others gave investment advice.

American real estate has been a popular draw for China’s money. But unlike the Japanese, who in the 1980s focused on high-priced U.S. trophy properties, the mainland Chinese prefer inexpensive commercial real estate, according to Val Higginbotham and Geoffrey Wu, partners in Trans-Asia Capital Corp., an Alhambra-based real estate investment firm.

China Minerals and Metals, known here as MinMetals Inc., purchased apartments in Seattle and Southern California. China National Cereals, Oils & Foodstuffs Import & Export Corp. invested in a cultural center and office buildings in Phoenix and apartments in Las Vegas and Los Angeles.

A Los Angeles firm, Financial Capital Investment Corp., has invested $500 million in U.S. real estate on behalf of wealthy Chinese, some from the mainland. Citic is rumored to be one of its investors.

Richard Alter, managing director of Financial Capital, says his publicity-shy investors demand anonymity. His holdings include the Hotel Inter-Continental in downtown Los Angeles and the Argyle Hotel in West Hollywood.

Outside real estate, Citic’s record in the U.S. is mixed. After purchasing a rundown steel mill for $18 million in Delaware in 1988, the firm encountered costly labor problems. But the Chinese were able to make CitiSteel profitable after spending an additional $20 million.

One of Citic’s most successful ventures has been Citifor, a Seattle-based timber exporter, which averaged $100 million in annual sales until timber prices collapsed. The firm says it owns 60 million to 70 million board feet of timber in Oregon, Washington and northern California.

By the mid-1980s, China’s state-owned giants had been eclipsed here by tens of thousands of smaller local-government ventures and private entrepreneurs. These ventures escaped notice because they were so small or were disguised.

From 1991 to 1998, nearly 350,000 mainland Chinese immigrated to the United States through family reunification or as company managers, investors or students. Many were students granted legal residency after Beijing’s violent crackdown on a peaceful pro-democracy demonstration in Tiananmen Square in June 1989.

Many of these Chinese intended to make the U.S. their home. Like earlier immigrants, they were seeking a haven for their wealth and families and much-coveted American college degrees for their children. Others were hoping to cash in on the world’s richest nation.

Some quickly discovered that the path to “Gold Mountain,” as the early Chinese immigrants called America, was dangerous.

The mainlanders often lacked sophistication about doing business here, according to attorneys who work with Chinese firms. Many were victimized by charlatans, often ethnic Chinese themselves. They bought worthless plots in the desert or overpriced projects that became financial black holes.

A subsidiary of China Travel Services, the giant state-owned travel agency, invested $110 million in a theme park in Kissimmee, Fla., called Florida Splendid China, with miniature replicas of famous Chinese attractions.

Businesspeople Encounter Problems

A local real estate broker says the theme park has lost as much as $7 million a year since it opened in 1995. A spokesman for the owners, whose park is regularly picketed by pro-Tibet activists, refused to comment.

In Los Angeles, a group of mainland Chinese businessmen spent $3 million in 1996 to purchase the Cockatoo Hotel, a trouble-plagued 213-room hotel near the airport that eventually was repossessed.

A company from Guangdong province that bought the low-rent Clark Hotel in downtown Los Angeles recently sold it at a loss after investing more than $20 million in renovations, according to real estate sources.

Nor have Chinese had much luck on Wall Street, where fewer than two dozen mainland firms with head offices in China or Hong Kong are listed on the New York Stock Exchange.

A few, such as China Telecom, the state-owned telecommunications firm, have prospered. But most have done poorly and are selling below their offering price, according to analysts. Some have pulled out.

Many of these firms didn’t understand stock markets or concepts such as shareholder value and fiduciary responsibility, explains N.T. Wang, director of the China International Business Project at Columbia University.

Wu Zhi Jian, chairman of Shenzhen-based Integrated Transportation Network Group, watched his firm’s stock plummet from $10 to $1.20 a share last year after unhappy U.S. shareholders sued, alleging they had been misled. That triggered a Securities and Exchange Commission investigation, and trading on the American Stock Exchange has been halted.

Wu, who built one of China’s largest car-rental and taxi businesses, blames inexperience and incompetent advisors. He says he had “at least 10 friends who had similar bad experiences when they listed their firms in the U.S.”

China’s companies are scoring some of their greatest successes in trade, where they are serving as a bridge between the booming U.S. market and low-cost Chinese suppliers or are helping U.S. firms locate Chinese customers.

After trying his hand at growing shiitake mushrooms and importing shoes and cigarette lighters, Ye Kang Song, founder of the El Monte-based Kang Long Group, discovered Wisconsin ginseng.

Ye established 110 stores in China specializing in the Wisconsin root, said to be superior to the Chinese variety that is a medicinal staple. Last year the firm sold $8 million worth of the American-grown ginseng and other natural health care products.

But China trade remains a high-risk occupation because of the economic and political volatility in both countries.

Richard Xu decided to play it safe.

For a decade, the Chinese trading firm he represents owned Seattle-based Modern Manufacturing, a key parts supplier for Boeing Co. But after the U.S. government forced another Chinese company to sell off a similar facility over security concerns, Xu feared that his firm would be next.

Last December, Xu’s firm sold the profitable U.S. subsidiary.

Xu says he sleeps better now that his firm has moved into real estate. But he is still anxious when he picks up the paper.

“Chinese who are working in high-technology worry that maybe someday the FBI will investigate their background,” he says. “People psychologically feel that way, they feel that shadow.”

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China’s Overseas Money

As China opens up and grows economically, so are its investments in other countries. About 13% of the total is estimated to be in the United States. Cumulative foreign direct investment worldwide, in billions of dollars:

Source: United Nations Conference on Trade and Development, World Investment Report 1999

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Monday: Chinese have a big presence in Silicon Valley.