China's outbound investment into the United States

The investment community has long awaited the growing wave of direct investment by China into the United States. Now, finally, despite continuing challenges, the US is swimming in Chinese capital. The Rhodium Group calculates that total Chinese direct investment in the US last year was US$6.5 billion, the highest ever, and the first half of this year has already seen US$4.7 billion of investment.
The first big wave of China's outbound investing was focused on natural resource and commodities plays. But, with the downturn in China's export economy and the related cooling of world commodities markets, such investments are less important. Today, a more urgent motivation to invest offshore is China's need to diversify its foreign reserve holdings.
The rational choice is for China to allocate more investments to the US, still by far the world's largest and strongest economy. US property markets are recovering, gross domestic product growth is back, employment is improving and US innovation continues to outpace the rest of the world.

Chinese banks face debt problems of local governments

In an article published yesterday in the Wall Street Journal about the financial sector in China says:
"The country's banking sector, a key part of a financial system that has powered China through three decades of breakneck expansion, is feeling the strain of years of rapid credit growth. Bank-fueled lending to state enterprises and local governments has led to overcapacity; serious debt problems for local governments, companies and lenders alike; and numerous white-elephant projects, from nearly empty malls and resorts to bridges to nowhere".
  The weakness at the banks is a major part of broader problems in China's financial sector. Many investors worry about the surge in off-balance-sheet loans employed by banks as a way to get around official lending limits, keeping the credit flowing to local governments and other high-risk borrowers. The surge in such "shadow-banking" activities prompted China's central bank to allow interbank borrowing costs to rise sharply in June—an attempt to rein in reckless lending. 
  The four largest state-owned banks by assets the Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd.—recently won board approval to issue up to a total of 270 billion yuan ($44.1 billion) in securities in the next two years.
  But the issue to raise more capital comes at a time of weak market sentiment.
China's banks have provided the resources necessary to finance the remarkable growth
rates of their economy. "In the process they surpassed their western rivals in market value,
as investors wanted a share of the country's growth". Based on market capitalization four
of the 10 largest banks in the world are Chinese.
   Much of that growth was built on politically directed lending. Some of it ended up establishing globally competitive industries ranging from steel to energy to solar panels. But a large portion also was used to build highways, railroads and other infrastructure projects sponsored by local governments.
  Assets in China's banking sector jumped 126.5% to about $21 trillion as of the end of last year from four years earlier, making it the fastest-rising banking system among emerging economies, according to Fitch Ratings Inc. But it also is the most thinly capitalized among those economies, with the amount of equity representing only 6.5% of total assets in China's banking system. By contrast, equity represents an average of 11.2% among 48 emerging economies.
  Most of the securities sales planned by the top four banks involve a kind of debt that banks can use to meet capital requirements and absorb losses from bad loans under new global and Chinese banking rules. The banks are seeking debt that doesn't mature for at least five years, providing a more stable source of liquidity than the short-term funds they lend to one another.

   Source: The Wall Street Journal