Chasing the China dragon

An old relationship presents fresh opportunities

CALIFORNIA’S economy was almost twice the size of China’s when Jerry Brown last visited, in 1986. Today, the governor of America’s biggest state (and the world’s ninth-largest economy, down from seventh in 1986) is the first to admit that things look different, as he and a 90-strong business entourage embark on a week-long trade and investment tour of China. Chinese investors, reckons Mr Brown, have $400 billion-$500 billion burning a hole in their pockets. “They like our almonds, our wine, our brains,” he says. “Instead of buying T-bills in Washington, they should be investing in California.”

Under China’s so-called “going out” policy, outward direct investment grew from $5.5 billion in 2004 to $65 billion by 2011. That figure should continue to rise, as should the relatively small share enjoyed by America so far. California’s strong brand in China—everyone knows where Hollywood is, and the Lakers are fervently followed across the country—leave it well placed to take advantage. A new office in Shanghai aims to attract Chinese investors as much as to help Californian exporters.

The first Chinese to seek their fortunes in California came during the gold rush of the late 1840s. Tens of thousands followed in the next few decades to work on the state’s vast railway projects. More recently immigrants and investors have flocked to the San Gabriel Valley, east of Los Angeles, where Chinese banks and estate agents jostle for space with America’s finest dim sum restaurants. California’s universities, and some of its high schools, teem with Chinese students. This “connective tissue”, says Mickey Kantor, a California-based former commerce secretary, gives the state an edge over its rivals.

  Yet only in the last year have state officials made serious efforts to forge connections with their Chinese counterparts, says Thilo Hanemann at the Rhodium Group, an economic-research firm. A Rhodium study found that California secured 156 Chinese deals between 2000 and 2011, more than any other state, but that the total value of these investments was less than other states hauled in. California has done a reasonable job of attracting private Chinese investment, perhaps because of its innovation-friendly reputation; it has had less success with state-owned enterprises and sovereign-wealth funds. And “That’s where the money is,” says Mr Hanemann.

Mr Brown will be looking for some of that money during his trip, particularly if he can direct it towards one of the two big infrastructure projects he sees as his legacy: the construction of a high-speed rail link between Los Angeles and San Francisco (the other is a tunnelling scheme to divert water from northern to southern California). The project is far from properly funded, and its costs are rising almost as quickly as its popularity is falling. Construction is supposed to begin this summer; an influx of Chinese cash could help revive the flagging momentum.

Renewables and clean technology also present opportunities. Green rules in California have contributed to a reputation for business-unfriendliness, but have also helped foster a market for technologies the Chinese are keen to buy: the country aims to spend $473 billion on clean energy during a five-year plan ending in 2015. The American arm of BYD, a Chinese electric-vehicle manufacturer, recently won a $12m contract to build ten buses for the city of Long Beach, south of Los Angeles.

But Chinese investments in the United States can jangle nerves. Security concerns in sectors like telecoms may be legitimate, but can also be used as a smokescreen for protectionist impulses. The memory of a state-owned Chinese firm’s attempt to buy Unocal, a Californian oil company, in 2005, is fresh among many Chinese executives, says Mr Hanemann. That bid collapsed after fierce opposition from American congressmen, including Californians.

As for Mr Brown, he evinces more frustration with his own state than with his hosts. He celebrates California’s achievements, from Apple to agriculture, but contrasts Chinese “dynamism” with the plodding focus on process at home. “We’ve lost the ability to build the space shuttle, the Golden Gate bridge,” says the man once known as Governor Moonbeam. “I want to be in the presence of people who build, who dream, who get shit done.”

The Economist