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Distressed US cities look to China for cash boost

While bankrupt Detroit has grabbed headlines, other troubled cities are courting mainland investment, sending inflows to record highs

PUBLISHED : Thursday, 01 August, 2013, 12:00am
UPDATED : Thursday, 01 August, 2013, 5:35am

With United States cities such as Detroit in financial trouble, Chinese investments in the world's biggest economy have hit a record high. However, such investments alone cannot save the country's debt-ridden cities, analysts say.

According to some estimates, up to 100 US cities were in financial distress, said Mao Tong, a partner at international law firm Squire Sanders. Last month Detroit became the biggest US city to file for bankruptcy.

Several cities in Michigan (the state where Detroit is) are under emergency management, indicating their severe financial conditions

"Many US cities have pension and other obligations far beyond their tax revenues, and it is troubling that some of these obligations are not required to be disclosed," Mao said.

"Several cities in Michigan (the state where Detroit is) are under emergency management, indicating their severe financial conditions."

Daniel Rosen, a founding partner of the Rhodium Group, a US economic advisory, said American cities, like many municipalities in Europe and China, were going through painful financial adjustments. "Many US states and cities have developed plans to court investment internationally," Rosen said.

Some US state governments have recently sent delegations to China seeking investment. California governor Jerry Brown, on a visit to China in April, announced a US$1.5 billion Chinese investment in Oakland, and sought investment in a high-speed railway for the state. Also in April, several state governors attended a US-China governors forum on the mainland, Mao said.

In May, four US mayors from North Carolina and Alabama visited China, and President Xi Jinping met Los Angeles Mayor Antonio Villaraigosa during the latter's visit to the mainland, Mao said. "There are US state and city delegations to China every year," Mao said. "Their missions often include attracting Chinese investment."

The first half of this year saw the largest Chinese investment in the US ever recorded at US$4.7 billion, while more than US$10 billion of potential Chinese deals in the US are pending, according to Rhodium. In comparison, Chinese investment in the US was US$3.6 billion in the first half of last year.

In the second quarter alone, Chinese firms spent US$2.46 billion on seven acquisitions and 10 greenfield projects in the US, Rhodium said. The number of jobs in the US provided by Chinese firms had grown to more than 33,000, the advisory said.

"Chinese investment cannot fundamentally alter the financial outlook for US cities or states, but it can serve as an important validation of their future economic potential," Rosen said.

Mao agrees that US cities in deep financial crisis cannot be saved by Chinese investments.

Rich people and businesses were leaving troubled US cities like Detroit, Mao said. "These insolvent or bankrupt cities have cut public services to the bone, so no investor would want to risk investing in such places. What is worse is the credit rating of these cities has been downgraded to junk status, so it will be very hard for them to raise money by issuing municipal bonds," he said.

China has its own debt problems. The State Council, led by Premier Li Keqiang, has called for an audit of debts of all levels of government to assess the severity of the risks facing the mainland.

Investments are made by firms, not countries, Rosen pointed out. "So the question is not whether the Chinese government's debt is serious or not, but whether it makes sense for individual Chinese companies to invest in operations, technologies and brands abroad. In many cases it does make sense."


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problem w/ US state/municipal govts is "democracy". citizens vote for ever expanding govt services/programs supported by PUBLIC unions (e.g. AFSCME which is also the largest union in US with 1.6 million members). this "democratic" system is people voting for "gift givers" such that union members' receive extremely generous pension, retirement healthcare benefits, something private sector employees could never even dream of. sounds good except these "benefits" are all UNfunded, virtual pipe dream beyond state/local govt ability to pay. unlike the federal govt, state/local govt cannot print money, the only option is default (declare bankruptcy). as early as 1980s, state/local govts saw what is coming and attempted to fix these unfunded liabilities by 1) trimming down generous payout to union retirees and 2) sell pension/liability obligation bonds to partially fund the liability gap. both strategies failed miserably as unions rejected the trim down proposal and elected officials who further expanded their pension/retiree healthcare benefits. selling bonds also failed as the liability is too big to fund and then the stock market bubble burst also negated the arbitrage vehicle of the bonding process. HongKong is expanding welfare programs. better take a very careful look at the US experience. history always repeats itself.
thanks for the interesting perspective
1. where are the "boom towns"? it certainly doesn't show in any US stats (*else Obama will be touting it big time).
2. min. pay is 3x HKG? tell it to the 7.6% unemployed plus additional 5% chronic unemployed. that is over 17 million people who have had no job for more than 9 months. also tell it to those who want full time job but could only get part time work.
3. 3000 sq ft mansion next to golf course cost less than HK$2M? couldn't be LA, SF or NYC. an average 2 Br/2Bth condo in Bay area cost at least HK$3.9 mil and that's condo. you can't compare smalltown USA to a world class glamor city like HKG.
4. US is heaven? tell it to those living in inner cities who are subject to violent crime, random gun violence, poor schools....
bottom line, US is "heaven" IF YOU HAVE $$$. but then, if you are rich, you can live in many heavenly places.
Even if China can handle its local debt problem and still have capacity to invest in the US. Why would they? Consider that even buying a butcher company in the US will still provide ammo to the China bashing congress and dc. The additional cost of dealing with these political hiccups may outweigh the benefits of investing in the US, especially when there are plenty of places there are in dire need of investments.


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