You could say that there are two faces of Chinese investment in the US. One is the urbane and humorous Foreign Minister Li Zhaoxing who, one hopes with some sense of irony, claimed recently that exports of Chinese-made fake Christmas trees benefited the US environment by reducing the need for real trees to be felled there.
The other face is General Zhu Chenghu of the National Defense University in Beijing, who last year somewhat impolitely threatened a nuclear strike against the US over Taiwan, which would have been not so good for trees in either country. This was rude and, what’s more, unnecessary. The best deterrent that Premier Hu has is a hotline to the People’s Bank of China down which he can shout not "Fire!" but "Sell!".
Li obliquely reinforced that close link between the countries by claiming – without putting his tongue too far into his cheek – that trade with China has helped create 4-8 million jobs in the US. The low-cost goods that China makes and exports have benefited US consumers and helped curb inflation, he added. I almost expected him to come out with the old Maoist trope and say that China and the US are "as close as lips and teeth", but in this case the teeth are well positioned to bite the lips.
China has to recycle its surpluses into the US economy in one way or another to keep the purchase orders flowing, but investment into industrial and commercial developments makes much more sense than buying bonds. Not only are the potential yields higher, such a strategy would enhance the long-term prospects of the American economy and ensure a longer-term customer base for the hyperactive Chinese factories. However, as the CNOOC-Unocal row showed, there are risks involved. The recent storm in a teacup over the Dubai Ports World acquisition of P&O shipping, and its consequent inheritance of five US port terminals, once again shows how this can operate.
Through the ports acquisition, the Democrats saw a way to exploit deep fears Americans have had about Muslims since September 11. So although ports and security specialists agree that the deal offers no threat to homeland security, and business interests agree that aggressive opposition threatens US positions in overseas markets, Republican legislators not wanting to be outdone by Democrat protesters promptly joined in trying to block the deal.
Despite the failure of the CNOOC bid, China is to some extent protected, as Li pointed out. Millions of jobs in America are tied to commerce with China. But one wonders whether Chinese business thinking is still trapped in the rust-belt-to-be phase that the West is eagerly shedding.
It is time to look at the services and retailing side. The best example is Lenovo – why make computers for other people to sell at a large markup when you can sell them yourself? Then in India there is Tata, the conglomerate that owned faltering tea plantations across the subcontinent. It bought the biggest British purchaser of its products, the Tetley Tea Company, and thereby turned its depressed agricultural commodity into a profitable branded item on the supermarket shelves.
However, with "Sinophobia" a potential close second to "Arabophobia" in the US, it is worth looking at what the Arab world is doing. Rising oil prices don’t just boost the Gulf states’ trade surplus with the West, and in particular the US, but also add to the revenues generated by sales made to India, China and Japan. The Asian nations use the proceeds of trade with the US to pay for their oil, thereby sending a secondary stream of recycled dollars flowing into Middle East coffers. Even though they are investing furiously at home, the Gulf economies are still much too small to absorb the flood of foreign exchange.
However, they have seen what can happen in America, so they have been percolating their holdings in through equity investments rather than outright acquisitions. There are alternatives to buying into strategic industries: most of Dubai’s American investments are in the real estate, service and retail industries rather than manufacturing. The fungibility of equity stakes makes them less vulnerable to scare stories and politically motivated smash-and-grab raids, not least since stakes can be bought through exchanges outside the US.
Britain is the largest equity investor in the US, and it is anyone’s guess how much of that is Arab or Asian money invested via London. Germany and the Netherlands are the third- and fourth-biggest investors in the US, and between them the Europeans offer overseas investors in the US some collective protection. While one should never underestimate the obtuseness of an American politician on a pseudo-patriotic rampage, it is difficult for them to tamper with such holdings. If they did, they would face European retaliation and, even more frighteningly, a loss of confidence that could crash the US markets.
The message is, don’t be a Wal-Mart outsource – be a Wal-Mart shareholder. When Hu is next on the hotline to the People’s Bank he should say: "Forget the bonds and buy some shares – but do it through London and Hong Kong."
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