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Silicon Valley's unflattering term for Chinese money

HONG KONG -- There are two kinds of cash rushing out of China right now: money actively looking for outside investment opportunities and funds that are simply fleeing.

Both kinds are flooding into Silicon Valley and elsewhere in the U.S. This not only reveals the changing economic balance of power, it also betrays China's precarious economy.

In San Francisco, in the state of California, investment bankers cater to the high-tech venture companies nearby. For the past 30 years, Eric Edmondson has been one of them. These days, he is seeing more startups hoping to be snapped up by BAT.

That would be Baidu, Alibaba Group Holding and Tencent Holdings, high-tech giants from China now busy gobbling up businesses and trophies around the world. Alibaba and Baidu are even being mentioned as possible buyers of AC Milan, a soccer team in Italy's prestigious Serie A league.

China's superwealthy see soccer teams as prime football real estate. And venture companies now see being acquired by BAT -- or by any other cash-flush entity -- as an "exit." Initial public offerings used to be the most common exits. And being acquired used to mostly involve a big American company, say Microsoft, Oracle or Intel.

Not anymore. That the list of buyers increasingly includes Chinese names shows how the balance of power among global companies is shifting.

BAT and other Chinese companies use acquisitions to improve their brands as well as to acquire technologies and customer bases. Their buying spree is also part of the Chinese government's "One Belt, One Road" policy to create a modern-day economic corridor along the ancient Silk Road.

Dumb money

But not everyone in Silicon Valley welcomes Chinese money. Some folks call it "dumb money," according to a 30-something American entrepreneur. The unflattering term is meant to imply that China Inc. is being too generous, even putting its money in iffy startups that U.S. venture capitalists stay away from.

China's opening its wallet to Valley startups is reminding some old-timers of the tech bubble of the early 2000s, when any venture with a name ending in ".com" could easily hoover up cash.

So put "dumb money" in the "simply fleeing" category.

Or perhaps under "has fled." According to the Institute of International Finance, a network of global financial institutions, a net $700 billion or so left China in 2015. This is a historic figure.

The pace has slowed this year, but rivers of cash are still flowing out of the country.

The outflows include money held by wealthy Chinese wary of the future course of their nation's economy and the possible decline in the value of their yuan. This money seeks a haven in Silicon Valley. So since the top priority is to simply get the cash out of China, investment decisions tend to lean over the border of ill-conceived.

"Bond King" Bill Gross

Bill Gross, who co-founded and turned Pimco into a globally renowned investment company, thinks the money gushing out of China is a warning sign. The "Bond King," as he is often called, has been paying attention to China's private-sector debt, which, by one estimate, has surpassed 150% of the country's gross domestic product.

Paying off its massive debt and making interest payments will soak up most of corporate China's profit. Very little will be left for productive investment, Gross believes. China could buy time by lowering interest rates. This would allow problems to remain hidden -- for a while. Gross added that the Chinese people themselves realize their money will run out if the country continues down its current economic path.

Gross is currently a portfolio manager at Janus Capital Group, and he can see the same "simply fleeing" effect from his office in Newport Beach, California. The enclave of luxury homes and resorts is also being flooded by Chinese money.

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