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Orville Schell on China Daily, “Challenges investors face in US, EU”

I thought this was a very accurate characterization by Orville Schell via an op-ed on China Daily of the “dysfunctional” investment relationship between China and the U.S. at the moment. My interpretation? On one hand, China welcomes investment with open arms; think Intel, GM, Caterpillar, and even Google investing in China. That creates tons of jobs in China. American politicians calls that “exporting jobs” to China. Now China wants to “export jobs” to the U.S. through investing, and the American politicians call this a national security issue! (Yes, if Chinese companies invest in the U.S., it would also mean they will derive revenue from the U.S.. That is the same thing already being done by U.S. multinationals like Intel, GM, etc. in China. That’s globalization.) The 50 Congressional Representatives Schell referred to? They are xenophobic, protectionist, and stupid.

Challenges investors face in US, EU
By Orville Schell (China Daily)
Updated: 2010-09-01 07:51

China now sits atop $2.4 trillion in foreign exchange reserves, the largest held by a country (Japan is second with $1 trillion). But this bounty comes with one big headache: where should Chinese officials park all that money?

International bankers estimate that roughly two-thirds of the Chinese reserves have been invested in dollar assets. In other words, China owns a huge chunk of America’s ballooning debt. Chinese reserves invested in these conservative financial instruments are relatively safe, but they yield little return.

The moment of truth is looming over both sides of this co-dependent, 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.

But 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 European Union’s (UN) economy, Chinese exporters also need European consumers to keep buying their goods.

But the reality is that neither the euro nor the yen is capable of soaking up China’s growing foreign exchange reserves.

It is hardly surprising then that Chinese officials have begun seeking more diverse and profitable investment possibilities across the world. 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 investment. This has been especially true when Chinese State-owned enterprises (SOEs) 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 Off-Shore Oil Corporation tried to buy 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 Congress’s 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 has 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. Huawei’s recent failed bids for 2Wire and Motorola would 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 Mississippi-based Steel Development in the hope of setting up a re-bar plant in the US.

News of the pending deal prompted 50 Congress Representatives from the US steel caucus to write a letter to Treasury Secretary Timothy Geithner, calling for an investigation into the threat the deal posed to US national security and American jobs.

Nonetheless, the latest spurning of Chinese efforts to invest in the US comes when capital-poor and job-scarce America (where unemployment is more than 10 percent) could truly benefit from more receptivity to investment from capital-rich China.

One might think the US government would be actively courting Chinese investment, not scaring it away unnecessarily. If American officials do not begin to recognize the realities of today’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 “old Europe” have recently edged closer to becoming “developing countries”. Indeed, it may be a painful recognition, but America’s share of worldwide foreign direct investment is now half of what it was two decades ago.

If the Barack Obama 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.

The author is director of the Center on US-China Relations at the Asia Society.

  1. sv!en
    September 1st, 2010 at 01:07 | #1

    I do agree that a significant part of the reactions of politicians and the general public when it comes to interaction with China is based on those famous factors Fear, Uncertainty and Doubt. Or, as you write, Protectionism, Xenophobia and Stupidity. This obviously needs to be changed — e.g. by taking care that as many people as possible, in particular among the young generations from China and ‘The West’ (however we define that), actually meet and interact with each others.

    However, I would like to point out why I think that to a certain degree Mr Schell is comparing apples and oranges.

    As far as I am informed, most ‘western’ investments in China consist of ‘western’ businesses taking their money and their technology to China to create new companies, factories and employment opportunities. The examples of Chinese investment in ‘the west’ given in the article all consist of Chinese businesses taking up existing western technology, companies and factories — sometimes (but of course not always) with an unclear perspective for the employees and the future localization of the technology. This kind of thing is business, obviously, and it happens among ‘western’ countries as well, but it always stirs public unrest — even if it happens between friendly neighbors like France and Germany (witness e.g. the struggles concerning every single localization decision of Airbus production, or the attempt of Siemens to buy a French nuclear technology company some years ago).

    A second aspect is that ‘western’ businesses are typically privately owned, whereas in China many big businesses are owned by the state. The main problem there is, that whereas most privately owned businesses anywhere on the planet are perceived as being interested in their business, technology, long-time success and — at least in many, albeit unfortunately not too many cases — the well-being of their employees, most SOC (anywhere on this planet and throughout history) are perceived as being led, at least to some degree, by certain strategic aims of the state itself. This, together with the fact that the Chinese state has a political system, philosophy and aims which seem, to say the least, alien to many people in ‘the west’, is probably what makes many of those people very reluctant to welcome investments by Chinese SOC.

    Personally I hope that, at some point in the future, people from ‘The West’ and China should have a better understanding of each other’s aims and thoughts and be more open to exchange and collaboration, with less strings attached on both sides (and let’s not pretend that investment in China is without those …).

    (disclosure — for what it’s worth: I’m from Old Europe)

  2. September 4th, 2010 at 01:03 | #2

    @sv!en

    Appreciate your comments. We share the same hope here. Agreed on your point even between supposedly friendly countries, there is that natural competition. This is expected too obviously between China and U.S. and Europe.

    If we ignore confounding factors and simply look at the presence of U.S. and European corporations in China as compared to the other way around, I think there is very little doubt U.S. and European corporate presence in China is much greater. At that gross level, it simply means China is much more ‘open.’

    In your second aspect about ‘western’ distrust of Chinese corporations – to me it is mostly born out of protectionism. The Chinese could argue the same way – the U.S. is stationing all these troops around China and therefore no U.S. corporation could be trusted – because indeed, in times of war or whenever, the U.S. government can simply will those corporations to do whatever it wants.

    Some would argue China is more protectionist with so many protectionist laws. While technically that may be true, but that is to ignore the fact that China is a developing country. During her WTO accession, the U.S. and the E.U. negotiated the terms of China’s entry as a partial developing country. China has largely followed WTO accession obligations. BUT, the U.S. supposedly is ‘open’ in fact use a lot of “national security” pretext (a WTO technicality) to block Chinese companies from investing.

    Really, we can argue small points. But the reality is completely visible. A Westerner simply visits China and physically count the U.S. corporate presence vs. doing the same of Chinese companies in the U.S. would immediately see my point.

  3. sv!en
    September 4th, 2010 at 06:44 | #3

    Dear yinyang,

    Thanks a lot for your long reply.

    I would like to focus on one detail: The presence of some US corporations all over the world (which occasionally is questioned and criticized in the EU just as it apparently happens in China) has a lot to do with the fact that US corporations have been incredibly successful over the last decades when it came to technological and scientific progress and innovation. We (and I think the EU and China are in the same boat in this case) simply need to become better and more competitive in these areas: Science, Technology, Creativity, Entrepreneurship and Innovation.

    Of course, protectionism is a problem — but the world does not look to Germany for cars, to Japan for cameras and to the US for electronics innovation because of protectionism. Many of the most successful companies are successful, and thus visible and present all over the world, because they are among the best in what they do — and I am certain that if a Chinese company gets to that point in whatever area (some computer-tech companies already are, for example), then they will achieve the same worldwide presence, visibility and success as those who are currently on top of the heap.

    (There are definitely areas where US companies have been very successful over the last century, which have not very much to do with science and technology and all this, but rather with mass culture and clever advertisement — Coca Cola and McDonalds being the most famous ones. If I had any idea how to become successful in such areas … I would be rich 🙂

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