china more than triples its foreign direct investment into the u

8/8/2019 China More Than Triples Its Foreign Direct Investment Into the U

http://slidepdf.com/reader/full/china-more-than-triples-its-foreign-direct-investment-into-the-u 1/3

China More Than Triples its Foreign Direct Investment into the U.S. for First Half of Year People·s Daily

Online reported today that China·s FDI into the U.S. hit $605 million during the first half of 2010, 3.6 times

the same period of 2009. This compares with year-over-year increases of 126% and 107% for China FDI

into ASEAN nations and EU nations, respectively.The U.S. appears to be maintaining its attractiveness to

Chinese investment, despite Congressional opposition and clamoring for protectionist policies in the steelindustry.People·s Daily Online takes note of this opposition, reporting ´As certain countries have begun to

restrict foreign capital, Chinese enterprises· overseas investment will face new challenges.µ´Certain

countriesµ likely means the U.S. Hopefully our policymakers and legislators will recognize that reluctance

on the part of the Chinese to continue the trend of increased investment will not help the U.S. recover

from its recession. What would be helpful would be for our officials and representatives to find ways to

lower the challenges when national security is not a real issue.

International Players Vie to Invest in Marcellus Shale Projects :International investment is snowballing to

the multi-billions in the Marcellus Shale, a large deposit of natural gas embedded in shale deep below the

northeastern United States. This month British BG Group closed its deal for Marcellus assets with EXCO

Resources for slightly less than $1 billion. Last month, India·s Reliance Industries bought a 40% interest in

the Marcellus acreage of Atlas Energy, Inc., a U.S. exploration and production company. In February, the

Japanese energy conglomerate Mitsui & Co. purchased a 32.5% stake in the Marcellus Shale assets of

energy giant Anadarko Petroleum Corp. The value of each of these deals exceeded $1.3 billion.According

to a recent report by industry expert John-Laurent Tronche appearing in the Fort Worth Business Press,

during the first three months of 2010, there were more than $2 billion of Marcellus Shale deals, including

foreign investments--a record for unconventional oil and gas plays. The Marcellus Shale is a formation of

marine sedimentary rock located in much of the Appalachian Basin of eastern North America. The rock

formation is named for a distinctive outcrop near Marcellus, New York. The Marcellus Shale runs across

the New York·s Southern Tier and Finger Lakes regions, northern and western Pennsylvania, eastern Ohio,

western Maryland, most of West Virginia and extreme western Virginia. In eastern Pennsylvania, the

Marcellus bedrock lies across the Delaware River into New Jersey . Consequently, the shale is relatively

close to some of the largest consumer and industrial markets for energy in the United States. On April 21,

Mumbai-based Reliance Industries Ltd. bought a 40% interest in shale gas acreage owned by Atlas

Energy, Inc., based near Pittsburgh, Pennsylvania, as part of its $1.7 billion joint venture with

Atlas. Reliance is the largest private sector company in India. The reported terms of the deal were $340

million in cash on closing and an additional $1.36 billion to fund part of Atlas·s drilling costs over 5 ½ years. Atlas· announcement emphasized that Reliance·s inbound investment would result in a significant

number of well-paying jobs for Pennsylvanians. Atlas reported that Reliance also obtained the right to

acquire a 40% interest in new parcels plus a right of first refusal should Atlas elect to sell additional

acreage in the future. Reliance is paying approximately $14,000 an acre, which is the highest price to

date for Marcellus acreage.Two months earlier, on February 16, Anadarko reported that it had signed its

joint-venture agreement with Mitsui E&P USA LLC, a subsidiary of Japan·s Mitsui & Co., Ltd. According to

Oil and Gas Eurasia, Mitsui paid $1.4 billion for its share in the venture. Anadarko stated that Mitsui will

earn a 32.5% interest in Anadarko's Marcellus Shale assets by funding nearly all of its development costs

through 2013. On a per acre basis. Mitsui paid slightly less than Reliance did for its deal. According to The

Wall Street Journal, an RBC Capital Markets study calculated the 2010 average price for an acre in

Marcellus Shale at $5,650.The trend is continuing. In the first week of May, Dallas, Texas-based

independent energy business EXCO Resources signed a Marcellus Shale joint venture for $950 million with

BG Group, Plc, a natural gas company based in Reading, England. BG Group is an integrated natural gas

company with operations across five continents. Under the terms of the transaction as disclosed by

EXCO , BG Group acquired a 50% interest in EXCO·s Marcellus Shale assets, principally in Pennsylvania

and West Virginia. The operations of the joint company will be based in Pittsburgh. Under the terms of the

deal, EXCO and BG will each participate in further acreage that the other acquires in the same

region. These global partners have a history. In June of 2009 BG Group has acquired an interest in EXCO·s

shale gas resources in Texas and Louisiana for $1.3 billion.The 2010 cross-border transactions added

momentum to the investment that has been building since November 2008. In that month Oklahoma-based

Chesapeake Energy Corp. formed a joint venture with Norway·s StatoilHydro for the exploration and

development of natural gas in the Marcellus region. In that deal, Chesapeake sold a 32.5% interest in its



Marcellus Shale assets for $3.375 billion and retained 67.5% working interest. Statoil paid $1.25 billion at

closing and agreed to fund 75% of Chesapeake·s share of drilling and completion expenditures until its

$2.125 billion obligation has been funded. Not all industry analysts are encouraging investment in U.S.

shale gas. Oil and Gas Eurasia quotes Texas geologist and consultant Arthur Berman who suggests that

this is yet another market bubble. Berman thinks shale gas reserves are greatly overstated, while the cost

efficiency of shale gas production is questionable at best. Furthermore, the prospect of producing natural

gas from the Marcellus Shale using new hydraulic fracturing, or ´hydrofracking,µ has raised serious

environmental opposition. The principal question is whether the drilling fluids used to break through the

rock in which the shale gas is housed can contaminate the drinking water aquifer. For example, today·s

Capital Business Blog reported that the Tompkins County legislature (representing Ithaca, New York and

surrounding communities) just passed a resolution urging the State Legislature to ban hydrofracking

pending further independent study. The debate promises to become far more robust than it had been,

given the environmental disaster resulting from the massive BP spill in the Gulf this month. None of the

debate has focused on U.S. regulation of inbound investment in this potentially significant source of clean

energy for much of the U.S. A subsequent post will analyze the role of the Committee on Foreign

Investment in the United States for the Marcellus Shale transactions.FDI Issues to Track in 2010: FDI

promises to grow in importance to both developed and the developing economies in the new year. The

world economy as a whole has not fully recovered from the slowdown of the past three years. What

recovery has occurred has been selective, leading to stronger economies in some cases and leaving

weaker economies in others. The imbalance suggests that opportunities for cross-border investments and

M&A activities will abound and that those businesses, funds and individuals that have available capitalwill likely pursue them.Heightened FDI activity will raise issues in the media, in academia and

elsewhere. The issues that will garner the greatest attention are likely to be:

Protectionism. If there is a sudden, large upturn in FDI into developed economies, will more inbound

transactions be challenged by regulatory authorities? At the end of 2009, the Obama administration

prevented the acquisition of FirstGold by a Chinese acquirer on national security grounds. Will this be

interpreted as protectionism disguised? CFIUS has rarely outright blocked deals in the past, so a

moderate increase in number of challenged deals may well be interpreted as a change in political

attitude. Complicating the assessment is that foreign buyers will likely be shopping for natural resources

business and high technology firms ² both of which may have assets that are inordinately valuable and

difficult to find elsewhere. These values may raise the stakes to investee nations when control of these

assets is shifted offshore. Credit Squeeze. Buyers and investors with strong credit lines will likely be very

attractive to targets who are starved for debt and equity capital. Distressed assets are in strong supply

and can often be revitalized with infusions from capital from new owners with adequate capital

supplies. Will buyers and investors remain disciplined and limit their capital at risk, or will there be

´shopping spreesµ as holdout sellers give up, price spreads narrow and well-endowed players run the

table?FDI Extends the Service Sector. Economies that have built their capacities and economic fortunes

on exports of manufactured goods with price advantages will seek to compete more aggressively by

incorporating more of the value chain into their enterprises. They may wish to acquire design capability

and marketing interface directly with their ultimate customers. Confronted with the question of ´buy or

build,µ some businesses will look to acquire or invest in businesses that provide those services. This

means businesses whose assets go home at night. From an operational perspective, this will raise issues

of conflicting corporate cultures. Return on investments into service companies can also be more difficult

to measure than investments in hard assets. The range of results on these deals will likely be broader

than in other investments. Developed Assets More Desirable. For investors in the U.S. and Europe, assets ²

both hard and soft ² that are developed and therefore require minimal additional expenditure, are likely to

be more desirable than those requiring considerable additional investment. Consequently, in bothdeveloped and developing economies, greenfield investments may have a difficult time competing for

investment capital. For outbound investors in China ² where capital appears to be less constrained and

risk tolerance may be greater ² greenfield investments in the energy and agricultural sectors will remain

top priorities. There may be a strong divergence that is building, with those economies and businesses in

need of significant capital infusions turning away from investors in the developed nations and looking

almost exclusively to investors in emerging economies.



y What Direction for Global M&A? The year 2009 brought a large number of strategic cross-border

mergers and acquisitions, many with high profiles. The trend toward consolidation within

industries will accelerate ² the Kraft/Cadbury transaction being the poster child for these

deals. Absent from the space at this time are the financial players, such as the private equity

funds who have relied on leverage to complete their acquisitions and generate their returns. Will

private equity and other private investors step back into the ring before credit has become more

available, or will financial deals continue to lag strategic deals? The lack of clarity ahead for

many businesses also adds uncertainty regarding valuation and pricing. With these factors taken

all together, the return of robust cross-border M&A transactions does not seem imminent.

The Commerce Department·s Bureau of Economic Analysis

has released three reports that provide

measurements. The first, by Thomas Anderson, addresses

new investments made to acquire or establish U.S.

business in 2008. The chart included in this post shows

annual outlays measured by this report.

Significant findings contained in the report include:

y Foreign direct investors made outlays of

$260.4 billion of outlays in 2008 to acquire or

establish U.S. businesses. This level is the third

highest on record.

y 46% of these outlays were for large-sized

transactions ($5 billion or more), double the

percentage of large-sized transactions for 2007.

y 2008·s level of these outlays was a 3% increase

over 2007·s level of $252 billion. The rate of increase for 2007 over 2006 was 52%.

y Outlays for manufacturing businesses accounted for the majority of spending in 2008, with

outlays for financial services businesses a distant second.

y European investors made 61% of the outlays; Asia and Pacific made 17%. Outlays from Canada

and the Middle East fell to 10% and 5% of the total.

y Of the $260.4 billion total, 93% of the outlays were made to acquire existing businesses, with the

balance to start up new businesses.

In April, the BEA had released its report on U.S. international transactions for 2008. Net financial inflows

for foreign direct investment into the U.S. were $325.3 billion, an increase of 37% over 2007·s level. These

inflows included financing of both existing and new U.S. affiliates and also reflected sell-offs and other

subtractions and additions. They also excluded domestic-sourced funds that are used to make new

investments.

Earlier this month, BEA revised the $325.3 billion number for 2008 FDI downward by $5.5 billion to

$319.7 billion. Because of a substantial upward revision to FDI reported for 2007, the new 2008 level

represented a 16% year-over-year increase.

BEA has discontinued its survey that measures new foreign direct investment. Therefore, there will be no

future reports on new FDI comparable to the first report referred to above in this post. Future surveys will

collect related information on greenfield investments by foreign direct investors and their U.S.

affiliates. BEA will also collect extensive data on FDI in the U.S. through its quarterly and annual surveys.

china more than triples its foreign direct investment into the u

Documents