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The China investment challenge
By Orville Schell
Thursday, Aug 26, 2010, Page 8
China now sits atop US$2.4 trillion in foreign exchange
reserves, the largest stockpile of any country in the world (Japan stands in
second place with US$1 trillion). However, this bounty comes with one big
headache: Where should Chinese Communist Party officials park all that money?
International bankers estimate that roughly two-thirds of Chinese reserves have
been invested in dollar assets. In other words, China owns a huge chunk of the
USˇ¦ ballooning debt. Chinese reserves invested in these conservative financial
instruments are relatively safe, but they yield little return. They have,
however, helped support Chinaˇ¦s economy by allowing Americans to run up consumer
debt by buying more Chinese goods than they rightfully need.
A moment of truth is looming for both sides of this codependent, and ultimately
dysfunctional, economic relationship. First, there are limits to how many
trillions of dollars China can, and should, put into US Treasury bills. After
all, should the dollar depreciate, China does not want to have too many eggs in
the US basket. Investors should diversify their risk and so must China.
However, with so much capital, the options are limited. Until the euro weakened
recently, Chinese bankers had been buying more euro-denominated assets, no
doubt recognizing that, despite the frailty of the eurozone economy, Chinese
exporters also need European consumers to keep buying their goods. However, the
reality is that neither the euro nor the yen is capable of soaking up Chinaˇ¦s
growing foreign-exchange reserves.
It is hardly surprising, then, that Chinese officials have begun to seek more
diverse and profitable investment possibilities worldwide. While we have become
familiar with Chinaˇ¦s ardent interest in natural resources such as oil, coal,
steel, copper and soybeans, we are far less acquainted with other kinds of
Chinese investments, including outright acquisitions of foreign companies.
Here, the US has not yet shown itself to be a particularly hospitable
environment for Chinese investments. This has been especially true when Chinese
state-owned enterprises (SOE) have aspired to buy, or buy into, iconic US
corporations that have a blush of national-security significance about them.
Things got off to a poor start in 2005, when the China National Offshore Oil
Corp tried to buy US oil firm Unocal. Even though almost all of the oil produced
by Unocal would have ended up on world markets rather than back in China, the US
Congressˇ¦ skittishness assured that Unocal was sold to homegrown Chevron.
Although Chinese investors have since made numerous lower-visibility plays in US
markets, the failed Unocal deal left a legacy of bitterness. So it is hardly
surprising that gun-shy (and miffed) Chinese investors are wary about making
further major efforts in the US. Huaweiˇ¦s recent failed bids for 2Wire and
Motorola will only have rekindled this bitterness.
Indeed, a case similar to Unocal arose this summer. The Anshan Iron and Steel
Group, a Chinese SOE, tried to buy a 20 percent interest in the
Mississippi-based Steel Development in the hope of setting up a re-bar plant in
the US. News of the pending deal caused 50 Congressional representatives from
the US steel caucus to write a letter to Treasury Secretary Timothy Geithner
calling for an investigation of the threat the deal posed to US national
security and US jobs.
When it comes to China, the US does, of course, have legitimate reasons to worry
about national-security issues. It was precisely to assess the impact of deals
with countries like China on national security that Congress established the
Committee on Foreign Investment in the US.
Even though relations with the US have improved, China is far from being
trusted. Indeed, it is still unclear where Chinaˇ¦s amazing evolution will
ultimately lead, so it would be naive for US leaders to assume that Chinaˇ¦s
intentions will always be friendly and constructive, or that the two countries
are inevitably destined to grow closer.
Nonetheless, this most recent spurning of Chinese efforts to invest in the US
comes at a time when the capital-poor and job-scarce US (where the real
unemployment rate is higher than 10 percent) could truly benefit from more
receptivity to investment from capital-rich China.
Consider a few facts. According to the Wall Street Journal, since December 2007,
the US has lost 16 percent of its manufacturing jobs (many to China), leaving
it with the lowest employment in this sector since before World War II. Of those
workers still in the private sector, almost 5 percent, or 5.5 million, are
employed by global companies whose headquarters are abroad. These same companies
not only pay higher salaries than their US counterparts, but account for 11.3
percent of capital investment in the US and provide 14.8 percent of its
private-sector research and development.
Given this, one might think the US government would be actively courting Chinese
investment, not scaring it away unnecessarily. If US officials do not begin to
recognize the realities of todayˇ¦s globalized world, the US may unwittingly (and
self-destructively) find itself cut off from the kinds of new foreign investment
flows that are sorely needed to revitalize its manufacturing and infrastructure
sectors.
The bitter new reality is that the US and ˇ§old Europeˇ¨ have recently edged
closer to becoming ˇ§developing countries.ˇ¨ Indeed, it may be a painful
recognition, but the USˇ¦ share of worldwide foreign direct investment is now
half of what it was two decades ago. If US President Barack Obamaˇ¦s
administration and EU officials cannot figure out the proper mix between
economic engagement and protecting national security, investment capital from
China will go elsewhere. That is a strategy that will leave the US and the EU
weaker, not stronger.
Orville Schell is director of the Center on US-China Relations
at the Asia Society.
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