Opinion

Benefits of direct investment

By Zhang Monan (China Daily)
Updated: 2011-05-18 13:50

Opening the door to China's growing overseas investment could help US job creation and infrastructure renewal

China's foreign investment was a hot topic at the third US-China Strategic and Economic Dialogue (S&ED).

Just before the S&ED meeting, some think tanks in the US actively suggested the US government welcome investments from China, arguing such investments would benefit the United States by creating jobs and boosting infrastructure renewal.

According to a study commissioned by the Asia Society in New York and The Kissinger Institute on China and the United States at the Woodrow Wilson International Center for Scholars in Washington, China's investment in the US has increased approximately 25 times in the past five years.

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As the Chinese economy grows, its foreign investment will increase. The report forecasts that China could invest as much as $2 trillion overseas over the next decade, according to the report.

But, even so, China's total foreign direst investment (FDI) in the US is just $2.3 billion, which is 0.1 percent of the total FDI in the US.

According to John Harry Dunning's theory of the foreign investment development cycle, a country's outward foreign direct investment (OFDI) is the function of its economic development.

On reaching a certain development stage ($2,000 to $4,750 per capita), transforming a country's investment becomes inevitable. The key to advancing this transformation is to improve the yield rate of OFDI, which can then form the competitive advantage of domestic capital.

The US-China economic imbalance, with China's tremendous trade surplus, reflects the relationship between the US, as a global financial center, and China, as a global manufacturing center, in terms of the international division of labor and the distribution of benefits.

In order to address this imbalance China should change the structure of its assets and liabilities and acquire more equity investment instead of debt investments.

As the US economist Joseph Eugene Stiglitz has observed, some emerging economies transform domestic corporations' trade surplus into official foreign exchange reserves, typically US treasuries with a very low interest rate (yield rate of 3 to 4 percent).

The US accepts these "commodity dollars" then invests them in the capital markets of fast-growing emerging economies, especially in Asia, to obtain high investment returns (yield rate of 10 to 15 percent).

China's equity investment in the US was only $126.5 billion as of June 30, 2010, only 10 percent of the US' equity investment in China. In comparison, the United Kingdom holds $324 billion equity investment in the US, Canada has $298 billion, and Japan, $224 billion.

In the wake of the financial crisis, Barack Obama declared that the US economy needed "industry reconstruction", but this requires large-scale investment in technology, clean energy development and new industries.

Such investments would not only fundamentally solve the problem of "jobless growth", but also play a significant role in promoting structural transformation of the US economy.

But, Chinese companies, both private and State-owned, still suffer various obstacles when they seek to invest in the US, as Chinese investments are routinely rejected as "threats" to national security. Huawei Technologies, Angang Steel and China National Offshore Oil Corporation have all been frustrated in their bid to acquire shares in US projects in recent years. And Chinese products more often than those from other sources become targets of anti-dumping and intellectual property cases.

The anti-China rhetoric among many officials and politicians in the US means that it is in danger of missing out on huge overseas investments by China that could benefit both countries.

The author is an economics researcher with the State Information Center.