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Should China's U.S. investments raise any red flags?

Posted: 14 Nov 2012 ?? ?Print Version ?Bookmark and Share

Keywords:foreign direct investment? mineral resources? energy? national security?

EE Times correspondent Junko Yoshida takes a closer look at a recent report released by the U.S.-China Economic and Security Review Commission concerning the fast rising level of investment that China is directing towards American companies. Yoshida believes it's a bit of a stretch to say that this is some sort of ruse that would put the national security of the United States at risk.

The report to Congress, "An Analysis of Chinese Investments in the U.S. Economy," offers a detailed look at China's foreign direct investment (FDI) in the U.S. and the potential economic benefits.

The cumulative value of Chinese investments grew to $30 billion through the end of 2011, compared to $5.8 billion at the end of 2010. As the chart below shows, Chinese FDI here has been rising steadily over the last decade. What sectors is China targeting with its U.S. investments and what if any strategy can we divine from these statistics?

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Unit: Billions of dollars. Source: UNCTADSTAT

The U.S.-China commission's statistics reveal that China's state-owned and state-controlled enterprises (SOEs) are dominating China's outward investments

Beijing "has made a conscious decision to diversify its foreign currency assets into hard assets," the report explains. This has led to the creation of sovereign wealth funds that make portfolio investments in U.S. equities, private firms and real estate, according to the report.

The Chinese government's FDI strategy is also shifting. While Chinese leaders previously encouraged investments "almost exclusively towards energy and resource acquisition in developing countries," it now also encourages "investments in advanced countries," such as the U.S.

Beijing's goals for these investments include "securing energy and mineral resources and acquiring advanced technologies in industries where China wishes to leapfrog existing competitors." This strategy falls in line with China's industrial policy as articulated in Bejing's 12th Five-Year Plan.

The acquisition of advanced technologies reflects China's strategy as a "second-generation innovator" that tailors technologies to its domestic market, then innovates from the ground up through manufacturing advances.

Economic benefits for U.S.?

The sharp increase of Chinese investment here in recent years, however, is not entirely a one-way street. State governments, squeezed by the recession and reduced federal revenue sharing, are "vigorously trying to attract Chinese greenfield investments in the hope of creating jobs and jump-starting local economies," the report correctly notes.

Here's another salient fact: Chinese investments are flowing here "by the availability of financially weak firms, some of which possess potentially useful technologies for China."

How do we measure the economic benefit of Chinese FDI in the U.S.? Unfortunately, the report describes it as "modest." Employment in Chinese-owned companies in the U.S. increased by 10,000 to 20,000 jobs during the past five years. Some may discount this total relative to overall U.S. employment, but it's nothing to sneeze at given the current U.S. job market.

The report credits Chinese FDI with helping to stabilise some financially troubled firms. Portfolio investments by sovereign wealth funds also have helped the U.S. economy by solidifying the financial system and providing liquidity in property markets.

The report also attempted to determine the regional impact of Chinese investment. Citing a unidentified source, the authors found that since 2007 that the Southeast and Southwest along with the Great Lakes and Far West regions have benefited the most. Industry sectors attracting the most investment included fossil fuels and chemicals, industrial machinery and IT. The financial sector also is a major recipient of Chinese FDI.

The Commission appears worried about the dominant roll of SOEs in U.S. investment decisions. SOEs reflect the demands of Beijing, while the government "behaves like an owner, providing overall direction to SOE investments, including encouragement on where to invest, in what industries and to what ends," the report warned.

SOEs also have unfair advantages over private firms when competing to purchase U.S. assets. Massive financial support from the central government could "determine market outcomes for purchases of U.S. business," the report noted.

As for national security concerns, the report goes so far as to characterise Chinese FDI in the U.S. as "a potential Trojan horse." I don't subscribe to this view. Indeed, economic and energy security appear to be the long-term concerns. For example, the report described Chinese investments in three energy technologies. Eventually, the authors said, production based on the acquired technology was shifted to China.

- Junko Yoshida
??EE Times

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