In May 2002, when Hu Jintao took his de rigueur tour of the United States just before becoming China’s president, he made two West Coast stops: San Francisco and Silicon Valley. But in February 2012, when it was current Chinese President Xi Jinping’s turn, he instead came to Los Angeles. That was no coincidence: Metro Los Angeles has become one of the top destinations in the world for Chinese investment, with money flowing into real estate, clean tech, entertainment, logistics, tourism and many other sectors.
It is easy to see why. Los Angeles is close to China and offers large-scale population and infrastructure, linguistic compatibility (the largest Chinese community in the United States), and arguably the best weather in the world. But there is tough competition for Chinese investment dollars – not just from New York and Houston, but also from Sydney (Chinese buy one-fifth of new residential properties there) and Nairobi, Kenya (where Chinese investors plan to build minicities with billions of dollars).
Becoming an even stronger magnet for Chinese investment, both globally and in competition with other U.S. metropolitan areas, must be a top priority for Los Angeles. L.A. unemployment rates remain stubbornly high, organic economic growth is unimpressive, little tax relief is in sight and big employers – such as Toyota – continue to leave town. China is the only game-changer on the horizon, and L.A.’s prosperity over the next decade depends on attracting more and more Chinese investment.
Some question the long-term impact, comparing Chinese investment with the flood of Japanese money in the late 1980s that soon slowed to a comparative trickle. But that involved private actors in a mature economy who were motivated by economic returns. For the Chinese, returns matter, but other powerful forces are also at work. The Chinese government, which owns the largest companies and has immense influence over the rest, encourages outbound investment as a matter of geopolitical strategy. China is accelerating this support with recent reforms to rationalize the Chinese economy and allow easier outflow of investment money.
Moreover, China is a developing country with a hugely greater population than Japan and correspondingly larger capacity for generating wealth. Its foreign currency reserves are approaching the equivalent of $4 trillion, without government hoarding: China simultaneously is creating billionaires at the fastest clip ever (37 in 2014, while the U.S., with nearly double the GDP, created only 50).
In addition, Chinese domestic conditions – from intolerable environmental and food-safety problems to the government’s vigorous anti-corruption campaign against unexpected targets, such as the sudden detention of CCTV star anchor Rui Chenggang in July – motivate a Chinese flight to safety into more developed economies.
Investment competition
U.S. cities employ a standard arsenal in competing for this investment, and some of the 88 cities in Los Angeles County are using those tools fairly effectively. San Gabriel Valley cities are famously hospitable to inbound Chinese. The city of Los Angeles has voted one Chinese real estate developer a $39 million tax subsidy. Officials from the Los Angeles County Economic Development Corp. regularly go to China to develop relationships. But other areas of the United States are wielding similar competitive weapons just as effectively.
Los Angeles should stand out by not just landing deals, but also by helping inbound Chinese businesses succeed after the contracts are inked – especially by grappling with the largely innocent failure of many Chinese executives to see strict legal compliance as a top priority. Mostly this is about business culture not business ethics.
All executives, everywhere, manage with instincts born of their experience. In the United States, we grow up with mind-boggling litigation costs and the potentially disastrous consequences of noncompliance, so it is second nature to seek advance advice from attorneys. But in China, enforcement of contracts and regulations is uneven, and solving legal problems might just mean invoking the help of a powerful friend. In that more flexible environment, advance legal advice and planning seem less important.
Chinese businesspeople who import that relaxed attitude often experience unexpected – and avoidable – losses, such as unenforceable contracts, regulatory penalties and litigation costs. These destroy profits and jobs and, as anecdotes spread, chill more Chinese investment.
Governmental entities that help recruit investors should alert Chinese businesses to these unique challenges; enforcement entities should take them into account in determining remedies for violations. Business organizations should support and help educate good-faith actors. And Chinese businesses operating here should consult local attorneys early and often – and encourage their inbound colleagues to do likewise.
Explosive Chinese investment into Los Angeles is likely, but not guaranteed. Remember Brazil: Chinese investment there plummeted by two-thirds from 2010 to 2013, in part because initial enthusiasm was dampened by on-the-ground obstacles to success.
When China’s next president-to-be tours the United States in 2022, will his or her Western U.S. stop be Houston instead of Los Angeles? The answer might well depend on how vigorously Los Angeles acts to help our Chinese friends succeed here.
Mike Margolis is a partner in the L.A. office of law firm Blank Rome, where he heads the team serving Chinese businesses and entrepreneurs operating in the United States.
