China is investing a chunk of money outside US Treasuries, about $45 billion (excluding bonds) in the first half of 2013 alone. Chinese investment outside bonds has drawn comparisons to Japanese investment in the US in the late 1980s; is China wasting money on high-profile real estate assets as Japan did? The answer now appears to be yes, and it may bear on the health of the Chinese economy.
Physical resources dominated Chinese investment through 2012, with energy, metals, and agriculture comprising almost 75% of total spending. While those deals have had problems of their own, they involved assets China clearly needs.
Starting in the fourth quarter of 2012, there has been a surge in real estate spending, led by acquisitions in London. A recent Chinese proposal for Royal Albert Dock adds to that. In addition, Greenland Group has taken a majority stake in what could be a $4 billion project in New York city. Many of the newly investing entities are private.
Some acquisitions make sense; others do not. ZhongRong wants to recreate London’s Crystal Palace, a 19th century wonder that burned down in 1936 and is missed by no one except ZhongRong’s chairman. Two large deals in the Bay area in the US were unrealistic and fell apart. Dalian Wanda is not content with choosing between the UK and US for billion-dollar developments — it plans for both. Last year, Wanda was enamored with the Caucasus.
This is getting a bit silly, but it is not a surprise. Like Japan 25 years ago, Chinese firms are sitting on a lot of money, including foreign currency. Like Japan, the money is burning a hole in some pockets, and will be wasted. This is almost inevitable with large-scale overseas investment — by China, the US, the Netherlands, or anyone else — and China the country can afford the losses, even if some Chinese firms cannot.
What is disturbing is the implication concerning opportunities at home for these firms. In the late 1980s, Japanese companies did not just have money to burn, they wanted somewhere to put it beside Japan. Japanese stocks and properties were overpriced and consumption was weak, limiting the appeal of new projects there. This turned out to be an omen of long-term difficulties.
The huge volume of government-orchestrated Chinese domestic investment has generated debate on whether it is justified – whether there are really good returns to be had or whether the government is wasting gargantuan sums of money through subsidies. Private Chinese money rushing out to rebuild palaces or Russian resorts argues against good returns at home. The evidence is far from definite but China may be inching down the Japanese path in more ways than one.