Interview with Siva Yam

The China Investor, Volume 1, Issue 1

Article By The China Investor Staff

Interview with Siva Yam

Siva Yam, President of the United States of America-China Chamber of Commerce, is sharing his insights about what we can expect from the trade and business relationship between China and America in 2017.

By The China Investor Staff

The United States of America-China Chamber of Commerce strives help both U.S. and Chinese companies to understand global trade and business dynamics and how they can remain competitive in a rapidly changing global economic environment. We have hundreds of members spanning virtually all industry sectors. Our members are varied in size, from small to large, although we tend to focus on helping mid-sized enterprises. We offer our members and the general public a broad range of networking events and educational programs exploring the requirements and issues of conducting business between both countries. 

We always strive to keep our members up-to-date on information critical to making well-informed business decisions. We continuously identify the most timely topics in this ever-changing, digitalized global economy and invite to our events business executives and professionals with first-hand experience to address these topics from different perspectives. The chamber hosts a variety of events throughout the year, including trade conferences, seminars, investment forums, and town-hall meetings, all designed to look at different issues as objectively and as practically as possible.

Believing that most successful business ventures are built on trust, and that trust can only be developed through first-hand relationships -- or what is called guanxi in China -- the United States of America-China Chamber of Commerce strives to facilitate the development of strong relationships between U.S. and Chinese companies. Over the years, the chamber has organized countless networking receptions, investment forums, trade missions and other related activities. Our most significant achievements, however, have been made through our Board of Directors and their broad network of contacts. They provide our members with direct access to business leaders and government officials in both countries who are essential to their business needs.

What do you think we can expect from China’s economy in 2017?

China’s economy entered 2017 after a relatively strong fourth quarter of economic growth in 2016, registering 6.8 percent on-year, which beat expectations of 6.7 percent as consumer spending in China increased. Domestic consumption in China accounted for 64.6 percent of total growth and the property market rebounded. However, other indicators, such as days-of-receivables (a measure of the average number of days a company takes to collect payments on goods sold), as well as inventory levels have both increased, suggesting that China’s economic health is less than robust. I believe that China’s economy will grow at a slower pace in 2017 than in the recent past.  

This is fundamental in nature. Although China’s economic growth is starting to stabilize amid the country's transition toward greater domestic consumption and away from manufacturing and investment-led growth, it continues to suffer from overcapacity and speculation in real estate, as well as a general lack of investment in innovation and improving quality. There has been too much reliance on directive from the government and too much uncontrolled, over-investment in basic manufacturing.  The situation is further complicated by the continued flight of financial and human capital.

What do you think the impact on the market might be with the new US administration?

President Trump has taken a tough stance in his trade policy against many trading partners, with China being a particular focal point.  During he presidential election campaign, he vowed to levy a 45 percent tariff across all products imported from China.  However, since his inauguration, he has been silent on the tariff.  Such tough talk with no subsequent specifics being announced has created considerable uncertainty and is forcing many countries to diversify their reliance on trade with the United States.  Many countries are now rushing to build up stronger regional trade partnerships and some overseas manufacturers that rely on the U.S. market are even considering relocating their manufacturing facilities to the U.S. in order to avoid potential trade barriers that could be imposed by the new Trump administration.  

The recent travel ban has also created considerable uncertainty and concern.  Many people are now awaiting greater clarity before making their next move.  In the meantime, Trade relationships between the U.S. and many other countries will remain strained.  And while the U.S. will surely take a more aggressive stance in its trade policy, it also seems quite clear that the new administration will likely not impose a 45 percent tariff on products made in China.  The U.S. will, however, likely file more anti-dumping cases and impose other sanctions on China, likely on a case-by case basis.

What obstacles might lay ahead for Chinese companies looking to invest in the U.S.? 

The Chinese government embarked on its so-called ‘Going-Out’ strategy back in the early 2000s, primarily to encourage Chinese companies to invest overseas and bring home to China a better understanding of open-market dynamics, modern management practices, new technology and innovation more generally. Unfortunately, most Chinese companies have done poorly in managing their acquisitions abroad. Many have ended up investing in the real-estate and hospitality industries. In many cases they have entrusted the management of these investments to third parties, thereby learning little in the process that can help them to improve their own competitiveness.  

Most Chinese investors accumulate their wealth in a captive market environment -- an environment in which relationships and symbolism have overshadowed good business fundamentals. They tend to have a poor understanding of underlying asset valuations, together with an obsession for acquiring trophy properties and an unreasonable must-win attitude.  

Many of them even invest in businesses of which they have very little knowledge and are unrelated to their core competencies.  The Chinese government has recently adopted a new policy to slow down or even stop overseas investment in real estate by Chinese state-owned enterprises and to tighten the outflow of capital from China through private enterprises.  For China’s overseas investments to succeed, Chinese companies need to accelerate their learning curves and the Chinese government needs to adopt a new strategy to allow market forces to incubate companies in a way that will allow them to stay competitive globally and to make better-informed and more rational investment decisions.

Why has there been an increase in Chinese outbound investment in the last few years and what has it led to? 

2016 was a record year for capital flight from China.  Since China began pursuing a “market economy with Chinese characteristics,” directive from the Chinese government has been the economy’s primary driving force. China’s so-called “Going Out” strategy was initiated with vigor about 15 years ago, but as an old Chinese proverb says: “the thunder may be roaring loud, but there still may be very little rain.”  

Chinese overseas investments did not reach significant levels until only a few years ago. The Chinese government has encouraged this outbound investment. But also, the Chinese society on the whole has become wealthier and the Chinese are finding it prudent to diversify their investments abroad, particularly as the domestic economy continues to slow and the manufacturing sector experiences more and more overcapacity. 

The domestic economy is dominated by an oligopoly of large companies and tycoons with strong relationships amongst themselves, leaving very few investment opportunities domestically.  Perhaps, another significant factor is rampant debt creation in China.  Over the last 10 years, China has created almost half of the world’s total debt.  China’s economy is highly leveraged, This leverage has been encouraged by the creation of high-yield investment and insurance products that have lured many Chinese investors.  China’s outbound investments are mostly long-term real estate speculations financed largely by short-term debt instruments.

What is the future of the American market?

I think the U.S. will continue to be a highly desirable destination for global human talent and financial capital. Despite some recent doubts about the system, the American market remains large, resilient, open, efficient and transparent.  I believe that Chinese investment will continue to flow into the U.S., just as Chinese students will continue to come to study and train at U.S. colleges and Chinese tourists will continue to visit the U.S. However, the new Trump administration’s trade and immigration policies will continue to cast a dark shadow of uncertainty and U.S. companies will need to develop new strategies in order to maintain their competitiveness as well as to expand their opportunities in relation to China’s changing economy and to successfully weather any changes or disruptions in U.S. trade policy.

What opportunities are there for Chinese investors in the U.S. economy? 
What are some recent trends or changes you have seen when it comes to Chinese investment in the U.S.?

China will continue to face many difficult challenges in 2017 including the continued obsolescence of its core manufactured goods, rapid technological change and the advent of ever-more sophisticated manufacturing technology.  China’s ‘Going-Out’ strategy may slow as the Chinese government implements restrictions on investing in real-estate overseas. Nonetheless, the U.S. economy will continue to offer attractive opportunities for Chinese investors to diversify and protect wealth, as well as for Chinese companies to modernize their management capabilities and to and to nurture their capacity for entrepreneurship and innovation.

What are some of the benefits for Chinese companies to invest in United States?

The U.S. remains the world’s leader in entrepreneurship, open-market dynamics, innovation and technology. By investing in the U.S, Chinese companies can benefit from these as long as they can help them to become more competitive in a globalized open-market environment.  For Chinese companies to realize the full potential of investing in the U.S., however, their investments should be synergic with their core competencies in China. For example, such investments might include the acquisition of, or investment in U.S. companies with superior marketing, management, manufacturing or distribution capabilities, or companies with innovative technology or more advanced research and development or else companies with stronger brands in the industries in which they operate.

How will China’s recent government controls on capital outflow affect investment trends? 

As you know, China has controls and restrictions on foreign exchange. In addition, many Chinese investments overseas are funded by debt instruments. As a result, the Chinese government has considerable influence over investment trends.  We expect that investment in real-estate and hospitality projects overseas will likely decrease.  Investments in industries that are strongly encouraged by the Chinese government will continue. These include investments in the fields of sports and entertainment, eCommerce, internet banking, finance, education, information technology, healthcare and aviation. Chinese companies will seek new opportunities for establishing or expanding marketing and distribution channels in the U.S, as well as opportunities to buy well-recognized name brands.

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About the Author
The China Investor Staff
The China Investor Staff

The China Investor Staff consists of writers, editors and industry professionals well-versed in all topics surrounding foreign direct investment, including private equity, real estate and more.

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