Why China Is Buying its Way into Detroit

Detroit will go down in history as the largest municipality in the U.S. to seek bankruptcy protection. And China, couldn't resist the temptation to cash in on the Motor City's troubles. It did exactly the same the moment Greece started sinking into recession. So, is China a wolf in sheep's clothing or is it really a deus ex machina?

A whole new Chinatown right in the middle of Detroit

A week after Detroit declared bankruptcy, Quartz talked with Caroline Chen, a real estate broker in Michigan. "I have people calling and saying, 'I'm serious. – I wanna buy 100, 200 properties,'" she said. And a couple of months ago, Shanghai-based property developer DDI Group bought two downtown Detroit buildings — the former headquarters of the Detroit Free Press and the David Stott building — for $4.2 million and $9.4 million, respectively.

What do Chinese investors see in this city? Once the emblem of America's industrial revolution and a vibrant urban center, Detroit has become nothing more than a ghost town. Everywhere you look, abandoned buildings lay in ruins reminding passengers of how dramatically the city has emptied out.

However, one man's trash is another man's treasure. And this is what Chinese investors are looking for in Detroit: Hidden treasures.

China and the U.S. are close trading partners. Meanwhile, rising labor, manufacturing, and even transportation costs in China mean that this country is slowly but steadily losing its mojo as the world's factory floor. So why shouldn't Chinese businessmen move their production closer to their customers? The upside potential in real estate residential, industrial, and commercial with all-time-low pricing makes Detroit an investment magnet.

More importantly, what better way for Chinese engaging in auto manufacturing to get their hands on valuable know-how than by putting down roots in the city that still remains synonymous with all things automotive? "While starting with batteries and auto parts, the spread of Chinese business [in Detroitis expected to result eventually in the sale of Chinese cars in the United States," reported The New York Times.

When China met Greece: A tale of two longtime allies

The string of bad news about Greece's financial situation raised a red flag for investors all around the world, forcing them to steer clear of everything with a Greek tag on it. Even so, the Chinese went against the grain. They opened up their pocketbooks and shook hands with Greek officials on numerous investment deals worth billions of euros and spread across a wide spectrum of economic activity, including shipping and tourism – the linchpins of the Greek economy.

The two nations have been doing business together for a long time -- long before the outbreak of the crisis in Greece. But this is a whole new ball game. Greece needs the money more than ever, meaning that it's willing to compromise.

Earlier this year, Greek Prime Minister Antonis Samaras cleared the path to residency in the cash-starved country. "Any Chinese buyer investing more than 250,000 (around $340,000) in real estate in Greece will be granted a five-year residence permit without having to fulfill any other criteria," Samaras told a gathering at a business conference in Shanghai. That's the lowest investment criterion among neighboring Southern European countries offering similar immigration programs.

Not to mention, the minimum wage in Greece is foundering upon rock-bottom levels as a result of the steep austerity measures aimed at helping the country make ends meet. If ever there were a time for the Asian Tiger to cement its position in Greece – the ideal gateway for exports to the whole of the Balkans, as well as the rest of Europe – it is now.

What's the catch?

The docks at Piraeus port – Greece's crown jewel and Europe's biggest passenger harborhave become an operational hub for the Chinese since Cosco, China's state-run shipping company, leased half of them three years ago. Cosco handily converted a business that moved at a snail's pace into a productivity powerhouse. But at what cost?

Greek dockworkers have made a stink about poor labor conditions at Cosco on more than one occasion, accusing the company of hiring part-time, unskilled laborers for chicken feed while cutting corners on worker safety. " I was jeopardizing my life and my colleagues' lives," said Dimitrios Batsoulis, a former Cosco dockworker who was fired after trying to raise concerns about safety violations, in an interview with The New York Times.

To top it all, despite the enormous increase in output, Cosco added only 19 people to its workforce in all of 2012, contributing nothing more than a drop in the bucket to Greece's meager jobs growth.

On the energy front, two years ago, the Chinese state-owned energy group Dongfang teamed up with Greek-based DTS for the production of solar energy plants and wind turbines. The deal was worth more than €2 billion, but it came with some tricky requirements attached. The panels that would be used for photovoltaic plants in Greece had to be purchased from Chinese producers. And when the Sky Solar Group, a Chinese developer of alternative power plants, decided to tap into the Greek market, it also made sure that all the necessary systems and technologies would be imported from China.

So, at the end of the day, who reaped the biggest gain from these so-called "win-win" deals?

Final thought

For Chinese investors, Detroit is a way out from a country that's been dragging its feet on relaxing capital controls leaving no room for asset diversification, requires that you wear a dust mask to protect yourself against atmospheric pollution, has a rigid political system and an overheated property market. Not only that but also, the EB-5 investor visa program – an immigration program that pairs foreign investment with a special type of employment-based green card – is definitely a carrot for wealthy Chinese.

For Detroit, creating an investment-friendly environment and attracting foreign capital is crucial to its survival. But nobody gives away free money. Detroit needs to keep its eyes peeled and make sure that the risk-reward scale tilts in its favor.

An investment you can trust

The market stormed out to huge gains across 2013, leaving investors on the sidelines burned. However, opportunistic investors can still find huge winners. The Motley Fool's chief investment officer has just hand-picked one such opportunity in our new report: "The Motley Fool's Top Stock for 2014." To find out which stock it is and read our in-depth report, simply click here. It's free!


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2727778, ~/Articles/ArticleHandler.aspx, 10/1/2014 2:48:23 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement