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Deal for AIG unit caps record year for Chinese investment in U.S.

Capping a record year of Chinese deal-making in the U.S., a consortium of state-owned and private investors is planning the biggest Chinese takeover of an American company: $4.2 billion for one of the world’s largest aircraft leasing firms.

The deal to buy 80.1% of International Lease Finance Corp., a Century City subsidiary of insurance giant American International Group Inc., followed a weekend auction in which another Chinese company bought three U.S. factories and other assets of electric-car battery maker A123 Systems Inc.

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Chinese companies this year also have picked up AMC Entertainment, one of the largest movie theater chains in North America, as well as stakes in energy, real estate and other companies in service industries.

The deal for the aircraft leasing firm, which must be cleared by federal officials, is a likely harbinger of more and bigger deals to come and reflects the increasing sophistication of Chinese companies and their determination to expand into new markets and strengthen their technologies and global capabilities.

ILFC owns and manages a fleet of more than 1,000 aircraft. With plush headquarters at Constellation Place, formerly known as MGM Tower, the company has relationships with nearly every major airline around the globe.

Industry experts said they didn’t see any apparent grounds for the U.S. government to reject the sale of ILFC, which has been on the market for four years and has little in the way of sensitive technologies that would threaten U.S. competitiveness or national security.

Even so, with the Chinese ramping up their investments in the U.S., analysts suspect they will face greater political scrutiny as the Chinese make increasingly bold and diverse moves to deepen their footprint in the U.S.

Excluding the ILFC deal, which is not expected to close until spring, direct investments by Chinese companies in the U.S. are likely to reach $6.5 billion this year, which would break the previous record of $5.2 billion in 2010, according to Rhodium Group, which tracks Chinese investment.

“The air is thick with concerns over China playing a role in the American economy,” said Tom Captain, principal and vice chairman of the aerospace and defense practice at financial advisory firm Deloitte. “There’s always going to be a question of due diligence and suspicions about their motivations.”

AIG, which disclosed the sale Sunday, said it and ILFC are consulting with all relevant U.S. regulatory agencies and intend to submit the deal for review by the Committee on Foreign Investment in the United States, which has considerable latitude in deciding which transactions to evaluate.

The committee, a Treasury Department-led group, reviews the assets and the detailed backgrounds of the buyers and considers the effect of such transactions on the national security.

Jon Diat, an AIG spokesman, pointed out that only 8% of its fleet was leased to U.S. carriers.

Although AIG has been trying to unload ILFC since 2008, when the New York company nearly collapsed and was forced to go under government control, the decision to sell rather than go public, as planned, caught onlookers off guard.

In the aviation world, little is known about the buyers, who have an option to acquire an additional 9.9% of ILFC, bringing the total price to nearly $5.3 billion. The investor group is composed of New China Trust Co., China Aviation Industrial Fund and P3 Investments Ltd.

New China Trust and China Aviation are state-controlled, and P3 is privately managed, said Derek Scissors, a Heritage Foundation economist who has long studied Chinese investments in the U.S.

In shattering the previous investment record, Scissors said the Chinese have come full circle from late 2004, when they announced the first big U.S. deal with Lenovo Group’s purchase of the personal computer business of IBM Corp.

At the time, it seemed to presage a new era of Chinese investments in the U.S., but the following summer, a Chinese state-owned company, CNOOC Ltd., withdrew its bid to buy Unocal Corp. after encountering fierce opposition in Congress.

And that sent a chill through Chinese investors looking at the U.S. Many instead focused largely on Africa, South America and Asia in search of energy and other commodities.

This year, though, the top three destinations for Chinese investments are expected to be three developed countries: Canada, the U.S. and Australia. Canada on Friday approved CNOOC’s $15.1-billion takeover bid for oil-sands operator Nexen Inc.

“The Chinese complain and complain that the U.S. market is closed, but they’re making deals,” Scissors said. Based on the pattern of past Chinese investments around the globe, “I think we’ll have another big year of buying next year” in the U.S.

China has been taking advantage of the global slowdown over the last four years to snap up bargain-priced assets abroad. Chinese firms also are looking to penetrate international markets and to buy technology, know-how and products not available at home.

In California, for example, a group of Chinese investors bought Silenus Vintners, a Napa winery, in 2010 with the aim of exporting wine to China, where demand is exploding. A year later, Chinese Internet giant Tencent Holdings Ltd. paid $250 million to acquire Riot Games Inc., a Santa Monica online video game company.

Thilo Hanemann, research director at Rhodium Group, saw little downside to the trend.

“Given the size of China and given the funds that are waiting in the Chinese economy to be invested overseas, it’s a once-in-a-lifetime opportunity for the U.S. economy to capture it,” he said.

Many U.S. state governors share that assessment and have traveled to China to attract investment and expand markets for their state’s goods. But there’s been less enthusiasm in Congress. Many members have been critical of China’s currency and economic policies as the U.S. continues to run a huge trade deficit with China.

And politics has loomed large in the trade relations between the two largest economies.

Recently some Republican lawmakers decried the bankruptcy and asset sale of A123, as the battery maker received about $130 million of a $249-million federal grant that it won under President Obama’s 2009 economic stimulus package.

These lawmakers called for scrutiny of the deal by Treasury officials to make sure no classified government-funded U.S. technology ends up in Chinese hands.

For AIG, a company that has historical ties in China, the sale of ILFC would end 22 years of ownership of that business. AIG bought ILFC, co-founded by Los Angeles billionaire Steven Udvar-Hazy, in 1990 for $1.3 billion in a stock swap.

Udvar-Hazy abruptly resigned as the firm’s chief executive in February 2010 to start the rival Air Lease Corp., also based in Century City, because the U.S. bailout of AIG had put restriction on executive compensation.

In the bailout, the government acquired a 92% stake in AIG and has been selling its stake as AIG’s financial position has improved. It said Monday that it would sell its remaining shares. The government, which pledged $182 billion to AIG’s recovery, already has made a $15-billion profit on the bailout.

don.lee@latimes.com

william.hennigan@latimes.com

Lee reported from Washington; Hennigan from Los Angeles.

Times staff writer Jim Puzzanghera in Washington contributed to this report.


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