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California Becoming a Favorite Chinese Investment

June 29, 1997|Joel Kotkin | Joel Kotkin, a contributing editor to Opinion, is a public-policy fellow at the Pepperdine Institute of Public Policy and at the Pacific Research Institute

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.

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