Thursday, November 10, 2011

Chinese Capital: Changing the World

Given the typically "unglobal" American world perspective, many U.S. ventures seeking EB-5 capital approach guys like me with the mistaken presumption that “it’s all about America”, that is, that U.S. permanent residency is so coveted that even the most fiscally-flaccid EB-5 offering well nonetheless be well-received abroad. Let me clarify that error:  it’s all about opportunity.


While Canada and countless other nations are working with China to channel their giant cash reserves toward their borders, the U.S. -- both the USG via its slo-mo fulfillment of promised Premium Processing for EB-5 and, even more so, the private EB-5 purveyors flooding the Chinese market with questionable ventures -- squanders this staggering opportunity to recover economically.  The combination of a weak global economy resulting in reduced manufacturing demand from China and the Chinese governments continued ban on speculative real estate investment have combined to make wealthy Chinese families eager to export their capital;  their appetite for a better life for their children – which is, according Sharon, the quintessential dream of every Chinese parent – must be satisfied abroad.  Right now, a number of elements, of stars aligned, is ideal, and this opportunity will not last forever.


According to this week’s projections by Ernst & Young, Chinese investments overseas will grow between 20-30% in the next two years.  Already the single fastest growing source of foreign direct investment (FDI) in the U.S., (according to the U.S. Department of Commerce), the potential for EB-5 capital from China is staggering:  I can tell you that while the major urban markets are congested with EB-5 promotion, our most surprising success on this past tour   has been in secondary markets.  In fact, the majority of our agent partners in China are brand new to EB-5!  As skeptical and worried as I was until just a few years ago, the most ethical agents in China have stuck to other country programs for fear of misdirecting their clients into yet another EB-5 scam.  Consider the facts that the best agencies are only now delving into EB-5 and that but a small fraction of potential SEC-compliant accredited investors in China have even heard of EB-5…and you will conclude as I have: we are but the tip of the Chinese EB-5 iceberg.


But these remain treacherous waters and seeing the Missouri, Victorville, and El Monte EB-5 projects sink like the Titanic has made for a wary Chinese market.   Not a cautious one, a downright scared one.  Because most of us marketing EB-5 are not giving the Chinese what they want. So...what DO they want? 


Well, for one thing, they want real job numbers.  Barry Johnson, the Executive Director of the U.S. Commerce Department’s SelectUSA, recently stated that from 2003 to 2011, $7 billion in Chinese-funded green-field projects had generated some 44,000 jobs.  When you consider that this $7 billion, 8 year job-creation figure is lower than the job numbers being promised by some slickly-marketed EB-5 projects seeking several hundred million in China, it’s a bit sobering.  Do we really expect that a particular megaproject will hit the surreal job numbers they project?  It isn’t about IMPLAN vs. RIMS II; it’s about truth vs. lies, and, collectively, our credibility with the Chinese has never been lower. The fact that you got ten times as many jobs because you are telling your investors that you are going to build ten hotels at one time isn’t dishonest econometrics on the part of the economist; it’s faulty fundamental data.  Build your first hotel with the real numbers, then go to number two, but let’s spare them your world domination plans for your new franchise of whatever it may be.


The other thing they want are real projects; they aren’t interested in capitalizing your pipe dream and they are WAY too smart to believe the inflated property values upon which your valuations are premised.  Middle class SFH residential developments in markets with existing 3 year “For Sale” inventories?? Get real!  The wealthy Chinese got wealthy because they invest in core industries which are tangible: mining (like Lake Point EcoVentures, which I am proud to say was fully susbscribed during my three week tour with Sharon) and manufacturing.  Core businesses which consist of more than slick architectural drawings, jaw-dropping projections for unproven technologies, and six-digit Googleword/Baidu promotional budgets.


Sharon and I are working very hard to educate our partners in China about what makes a good EB-5 opportunity.  There are very few of them out there, unfortunately.  Congress wanted the EB-5 to be a fair exchange: invest in American jobs and get your U.S. residency.  For many in the U.S., that has translated into one-sided opportunism, not the quid pro quo contemplated via Congressional Intent. 


Until America provides China with a steady stream of what their capital appetite seeks, we will continue to lose ground to other nations with more progressive, attractive and responsive investor visa structures.


 


 



No comments:

Post a Comment