There is more than a whiff of paranoia and xenophobia in the anti-China sentiment coming from some in the US Congress. Democrats and Republicans were united in expressing their jaundiced view of China with the release of the bipartisan US-China Economic Security Review Commission's 2005 report. Commission members' motivations range from genuine concerns about human rights to atavistic fear of China overshadowing the US economically and politically, but it can all be boiled down to one thing: Beijing-bashing.
"It [the commission] does a good job of defining the difficult issues we face with China, but its standard solution is to beat the Chinese over the head until they comply," said William A Reinsch, the 12-strong commission's sole dissenting member.
With the US burdened by a US$200 billion trade deficit with China, trade unsurprisingly gets a top billing in the report, the commission recommending "an immediate, across-the-board tariff on Chinese imports" unless Beijing allows the yuan to appreciate at least 25% against the dollar or a trade-weighted basket of currencies. While they may have a point on currency undervaluation, successive US governments' encouragement of the de facto devaluation of the dollar somewhat undermines the politicians' self-righteous anger. But Congress has long adhered to the "do as we say, not as we do" principle on trade issues, effectively demanding immediate execution of WTO judgments on other countries while refusing to accept them against the US. When it comes to China, it often seems as though this insular insouciance is redoubled.
Bad for inward investment
This attitude may explain the commission's recommendations for executive action against the US-based assets of Chinese companies if the parent company is deemed to be involved in the transfer of Weapons of Mass Destruction. Such legislation, if passed, could have a chilling effect on Chinese inward investment. Undeserved or not, the US government has a reputation for seeing WMDs where no one else can. In what could amount to another blow for inward investment, the report also suggests the Committee on Foreign Investment in the United States (CFIUS) receives tighter Congressional oversight. This would put responsibility for the investment process in the hands of those people whose attitude to Chinese competition Reinsch described so neatly.
However, while the hawks are circling at national level, American states and municipalities are desperate for inward Chinese investment. Within days of the commission's report being published, California governor Arnold Schwarzenegger was on his way to China in search of investment to boost his state's economy.
New York Senator Charles Schumer, one of Washington's most vociferous campaigners for a tariff on Chinese imports, didn't exactly fight off the Lenovo takeover of IBM's New York-based PC business. Indeed, New York's state governor and city mayor have recently visited China to woo investors. These investment-hungry worthies are following in the footsteps of officials from Minnesota to Maryland, all of whom want to take a slice of China's new-found riches.
The tangible results of this investment, though, are harder to find. An insider at the New York state office said it was "an ongoing process," while a trawl for notable success stories around other states' and cities' economic development agencies drew a similar blank. There is plenty of evidence of US investment in China, with a growing number of firms even outsourcing their warehousing there, but precious little the other way. The picture is of bees hovering around a honey pot, unable to get the lid off.
Given that, in terms of corporate investment, last year China invested one dollar abroad for every 12 the rest of the world put into China, it may seem anomalous to tap Beijing and Shanghai for funds. But this is no ordinary situation. Of course it seems counter-intuitive for Chinese investors to come to the US while a flood of American businesses are relocating to China where labor costs are so much lower. Despite the declining wage levels in American manufacturing, it will be a long time before China, Inc outsources to the Sunbelt states.
Buying market access
This does not preclude investment, though. Not all Chinese companies want to build manufacturing plants: an investment in the US is a shortcut to accessing the American market. As Donald Straszheim of Straszheim Associates points out, Lenovo's acquisition of the IBM PC business presented an opportunity to skip the 25-year brand-building process that Japanese companies like Sony or Toyota had to go through in order to hit it rich in America.
Through its purchase, Lenovo has tapped into an established reservoir of brand recognition, sales, distribution and research expertise, which not only launches it in the massive US market, but also improves its own domestic operations.
Another issue worth considering is that there is no real shortage of capital in the US – largely due to the huge inflow of Chinese state investment in US treasury bonds, which keeps US liquidity levels high. What US state and city officials are trying achieve is not so much an increase in Chinese investment, merely its redirection.
For the US, Chinese corporate investment in domestic companies and real assets is strategically much more secure than treasury bonds, which can be sold at the drop of a hat. And China might find that most reasonable commercial investments pay much better dividends than treasury bonds.
It could also be argued that an investment in productive assets rather than bolstering fiscal and economic irresponsibility, may result in more rational US government policies overall. Judicious cultivation of US mayors and governors, the heavy hand Bejing out of sight, may even help cultivate a pro-China lobby in Washington and put an end to Congressional Sinophobia.
Ian Williams is a New York-based journalist writing on politics and economics.