from Renewing America

Attracting Chinese Investment: Here's Where to Start

Chinese yuan banknotes (Carlos Barria/Courtesy Reuters).

February 10, 2012

Chinese yuan banknotes (Carlos Barria/Courtesy Reuters).
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The Renewing America initiative has published today a new Policy Innovation Memorandum, "Fostering Greater Chinese Investment in the United States," which looks at what the United States should be doing to attract greater foreign investment from China. The paper, by David Marchick of the Carlyle Group, a leading expert on FDI issues and the author of the book, U.S. National Security and Foreign Direct Investment, contains some striking figures.

While China is an export powerhouse, it remains an investment lightweight. Total outward Chinese direct investment is smaller than either Ireland or Singapore. And the U.S. share is particularly small -- just 2 percent of China's overseas investment, even though the United States currently receives about 15 percent of total global investment.

As Marchick points out, there are many practical problems in boosting Chinese investment. A business sector that is comprised either of small private enterprises or large state-owned enterprises is not especially conducive to foreign investment. And those Chinese companies that are looking abroad face a steep learning curve in negotiating what are often complex transactions.

But the paper argues that the United States needs to start by making it clear that this country actively wants and will encourage Chinese investment, and by working with China to eliminate misperceptions and clear away unnecessary obstacles where they exist. Both countries need to move beyond the bad feelings that were generated in 2005 when the Chinese oil company CNOOC faced a political firestorm over its effort to purchase Unocal.

The timing for such an initiative could not be better. The Obama administration has already announced a strong policy of encouraging foreign investment. The visit to Washington of Chinese vice-president Xi Jinping is the perfect opportunity to tailor that message for a Chinese audience, and to deliver it at the highest levels. Xi, who will become the next president of China, is already more familiar with the United States than any previous Chinese leader, having spent time here as an agricultural official, and having sent his daughter to Harvard.

Such an initiative would also help to counter-balance some of the increasingly tough rhetoric and action on trade out of the Obama administration. The White House recently launched a new trade enforcement task force that is largely aimed at China, and a number of high profile disputes, including one involving solar panels, are set to raise trade tensions. An investment initiative would help make clear that the administration wants to see economic gains for both sides.

The experience with Japan is instructive. Trade relations with Japan soured badly in the 1980s when exports surged even as Japan's market remained largely closed to U.S. products. While Japan has never done much to open itself to imports, trade relations with the United States improved after Japan began investing heavily in this country, building cars and other products and creating good-paying jobs. As a result, members of Congress with large Japanese investments in their districts began defending those companies when trade disputes would arise.

The same needs to happen with China. David Marchick's paper offers a blueprint for where to begin.

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