WebMemo22

Published by The Heritage Foundation

“Rebalancing” Chinese Investment in the U.S. Derek Scissors, Ph.D.

The People’s Republic of China invests a greatdeal of money in the U.S. The Department of theTreasury’s latest tally puts China’s financial stake inAmerica, as of the middle of last year, close to $1.5trillion, or the equivalent of 12.7 percent of U.S.public debt at the time. Even that figure is too low,since Treasury assigns $650 billion in investment inthe U.S. to the Cayman Islands and hundreds of bil-lions to other known thruways for national inves-tors like China.1

More is on the way. The PRC’s trade surplus inparticular brings dollars that head back to the U.S.as investment. China’s currency rules mean that for-eign reserves cannot be used at home. Becausereserves are so large—$2.5 trillion and rising—most end up in the one foreign economy largeenough to absorb them: America’s.

The strange part is that Treasury’s data indicatethat 94 percent of Chinese investment in the U.S.goes to low-yield U.S. government bonds. Chinahas clear interests beyond bonds. The HeritageFoundation’s China Global Investment Tracker doc-uments nearly $200 billion in global spending byChinese firms outside bonds between January 2005and June 2010. An additional $130 billion inattempted investment failed for various reasons.2

China’s investment in the U.S. is skewed towardthe government in part because political oppositionhas blocked spending outside bonds—investmentprotectionism. There is certainly a very narrowrange of sectors directly important to national secu-rity that should be off-limits. Yet most of the politi-cal opposition goes well beyond that. Such

opposition is not well-considered; the U.S. shouldaccept more non-bond investment.

Losing Out. The Heritage tracker misses smallpositions in American stocks taken by the two Chi-nese sovereign funds, the China Investment Corpo-ration and the State Administration of ForeignExchange. It excludes slowly expanding U.S. lend-ing by Chinese banks. Even granting these omis-sions, the U.S. receives very little Chinese non-bond investment.

The U.S. is a distant second to Australia inattracting Chinese non-bond investment since2005, but that is a misleading result. Of the top 10recipients of investment (which excludes engineer-ing and construction contracts) over that period,the U.S. has drawn by far the least as a percentage ofGDP. Moreover, of the other countries below the 1percent mark, Brazil’s and Canada’s totals are nowrising rapidly.

The list of top Chinese investment targetsincludes countries blessed with sound invest-ment environments, countries with rich naturalresources, and a few countries offering both. TheU.S.—with coal, natural gas, iron ore, and othernatural resources—offers both, yet it draws trivialChinese investment as compared to annual GDP.12

No. 2956July 13, 2010

This paper, in its entirety, can be found at: http://report.heritage.org/wm2956

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aid or hinder the passage of any bill before Congress.

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The obvious reason is that all the money goes tobonds. Diversion over time of just 5 percent of Trea-sury’s (too low) estimate of Chinese bond holdings

in June 2009 would cause total non-bond invest-ment in the U.S. to quadruple to $90 billion. Chi-nese money is pouring into this country—but all to

1. Department of the Treasury, Federal Reserve Bank of New York, and Board of Governors of the Federal Reserve System, “Report on Foreign Portfolio Holdings of U.S. Securities,” April 2010, at http://www.treas.gov/tic/shl2009r.pdf (July 12, 2010).

2. Derek Scissors, “China Global Investment Tracker: 2010,” Heritage Foundation White Paper, July 7, 2010, at http://www.heritage.org/research/reports/2010/02/china%20global%20investment%20tracker%202010. For more detail, see Derek Scissors, “Tracking Chinese Investment: Western Hemisphere Now Top Target,” Heritage Foundation WebMemo No. 2952, July 8, 2010, at http://www.heritage.org/Research/Reports/2010/07/Tracking-Chinese-Investment-Western-Hemisphere-Now-Top-Target.

heritage.orgMap 1 • WM 2956

U.S. $22.9

AUSTRALIA $33.3WESTERNHEMISPHERE $43.9 Canada $10.8 Venezuela $8.4 Brazil $6.6

SUB-SAHARANAFRICA $31.0 South Africa $6.1 D.R. Congo $5.9 Niger $5.2

ARABWORLD $32.9 Saudi Arabia $8.0 Algeria $6.6 Iraq $4.2

EUROPE $36.7 Britain $8.7 Greece $7.7 Switzerland $7.2

EAST ASIA $29.7 Indonesia $8.8 Singapore $7.0 Vietnam $3.5

WEST ASIA $35.8 Kazakhstan $11.4 Iran $11.1 Russian Fed. $5.9

China’s Worldwide Reach

Source: Heritage Foundation dataset, China’s Outward Investment: Non-bond Transactions over $100 million, from 2005 to June 2010, available upon request from The Heritage Foundation.

Figures are in billions of dollars; key nations in italics.

The United States is second to Australia in drawing Chinese non-bond investment.

CHINA

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the federal government. This is a very poor way tocreate jobs, among other things. The misallocationis not due to Chinese investment choices, however,but misguided American political objections.

Dubious Barriers. China’s program to “go out”and acquire overseas assets began in the U.S. ThePRC effectively entered the world of modern merg-ers and acquisitions when Lenovo bought IBM’spersonal computer unit in 2004. Its place in thatworld changed violently when CNOOC wasblocked from acquiring Unocal in 2005.

There are sound arguments to restrict Chineseacquisitions. At their core is the dominance in out-ward investment of arms of the Chinese govern-ment and state-owned firms. While morecommercial in operation than their ancestors 20years ago, they are still not commercial entities.They frequently serve the Chinese state’s broad stra-

tegic purposes and, in turn, receive huge subsidieswhen Beijing desires. There is also the prickly issueof reciprocity. With American investment in thePRC heavily restricted, it rankles many to permitChinese investment in the U.S.

Legitimate and prudent restrictions, however,should not be permitted to morph into knee-jerkreactions that harm American interests. Even in thesensitive area of technology, there have been odddecisions. Bain Capital brought Chinese telecomHuawei in as a small minority partner in its buyoutof 3Com because Huawei and 3Com had a non-compete clause. The deal was blocked on nationalsecurity grounds, but 3Com then partly relocated toChina, which seems to be a worse security outcome.3

Natural Resources: The Biggest Problem. Afterthe Unocal failure, the PRC turned toward Australia(and now Canada) for natural resource acquisitionin a modern regulatory environment. The U.S. islosing investment—or seeing it diverted to govern-ment bonds—that would serve a range of nationalinterests. Permitting the PRC to share in Americangas production, for example, could improve China’sstatus as the world’s top air polluter.

The situation has become more striking in thelast few months. Over seven weeks in spring 2010,India’s Reliance Industries took two large minoritystakes in multi-billion-dollar shale projects in theU.S. Reliance’s spending alone will be in the billionsof dollars and exceeds all Chinese non-bond invest-ment commitments from January to June and thehistorical total for all Chinese investment in Ameri-can mineral resources. Meanwhile, China’s AnshanIron faces political objections to acquiring a smallminority stake in a $200 million steel plant.4

Reliance’s plans have, properly, elicited noresponse, but the Congressional Steel Caucuscharges that the Anshan deal will subvert Americansecurity. This is nothing short of outrageous. Secre-

3. The New York Times, “3Com Scraps Buyout After Regulatory Roadblock,” February 20, 2008, at http://dealbook.blogs.nytimes.com/2008/02/20/3com-bain-withdraw-deal-from-regulatory-approval (July 13, 2010); Hiawatha Bray, “3Com Hitches its Wagon to China,” The New York Times, at http://www.nytimes.com/2008/05/01/business/worldbusiness/01iht-3com.1.12480842.html (July 13, 2010).

4. Min Zeng, “Anshan Sticks with U.S. Steel Investment,” The Wall Street Journal, July 9, 2010, at http://online.wsj.com/article/SB10001424052748703636404575353390000243012.html (July 13, 2010).

KazakhstanSingaporeIranAustraliaSouth AfricaSwitzerlandCanadaBrazilBritainUnited States

8.83%3.66%3.32%3.17%2.11%1.46%0.78%0.41%0.40%0.16%

heritage.orgChart 1 • WM 2956

Chinese Investment Is Tiny Part of U.S. Economy

Sources: The Heritage Foundation, “China Outward Investment, 2010,” at http://thf_media.s3.amazonaws.com/2010/xls/China_Global_ Investment_Tracker2010.xls; International Monetary Fund, “World Economic Outlook Database,” at http://www.imf.org/external/pubs/ ft/weo/2010/01/weodata/index.aspx (July 13, 2010).

Tracked Chinese Investment as a Percentage of 2009 GDP

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tary of State Hillary Clinton, among others, hasrightly called unprecedented deficit spending a truenational security threat, while Congress and theAdministration are unable to stop themselves fromborrowing $1.5 trillion from the PRC. Yet $15 mil-lion or so in a steel plant that will actually createjobs is the target of congressional ire.

Better American Policy. Some deals involvingChinese enterprises do go forward. No complaintshave been made to date against General Motors’ saleof its Nexteer Automotive unit to a joint venturebetween Chinese auto parts supplier Tempo and theBeijing municipal government for approximately$400 million. But if a tiny steel investment threatensnational security, why not a much larger auto invest-ment? Chinese investors and their American part-ners have to guess where political lines are, which isthe antithesis of a sound business environment.

The first policy step must be to remove confu-sion caused by ongoing and haphazard politicalinterference. Because most Chinese investment inthe U.S. is made by state-owned entities, it will bereviewed by the Committee on Foreign Investment

in the U.S. (CFIUS). Restrictions beyond CFIUS atthe sector level, such as in transportation, shouldbe examined by the Departments of Defense andTreasury to ensure they have a genuine nationalsecurity purpose and removed if they do not.Purely political opposition should not be permittedto derail Chinese investment, and the large bulk ofthe economy should be open, with clear and con-sistent regulations.

Long-Term Solutions: Treaty Needed. For thelong term, depoliticized and reciprocal investmentaccess can be protected only by a proper bilateralinvestment treaty. Negotiating one will be a difficultand lengthy process due to the non-commercialoperation of Chinese state enterprises. However, inaddition to making many needed demands onBeijing, the U.S. should be able to offer transparentaccess to most of the American market. Such an out-come will prove a useful diplomatic tool and, moreimportantly, will help the American economy.

—Derek Scissors, Ph.D., is Research Fellow in AsiaEconomic Policy in the Asian Studies Center at TheHeritage Foundation.