The Next Big Threat to US-China Ties
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The Next Big Threat to US-China Ties

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The United States and China have long lobbed verbal grenades across the Pacific, each blaming the other for global imbalances due to currency manipulation or fiscal irresponsibility. But a new challenge to Sino-US relations is emerging, one that will brush aside the bones of contention that now occupy policymakers – Chinese investment in the United States.

So far, Washington hasn’t unveiled a clear strategy to address this impending source of friction.  It needs one.

With $3 trillion in foreign currency reserves, China needs to invest its money abroad. Its domestic, export-led economy is no place to absorb all the capital. In addition, inflation is stubbornly high and rising labour costs have begun to push production elsewhere, threatening China’s solid growth rates. Meanwhile, limited investment options have led to an alarming asset bubble.

Beijing must tread a fine line in trying to keep its economy growing at a sustainable pace while developing a model for growth that no longer depends on cheap labor and the abundant use of natural resources. That means restructuring the Chinese growth model by moving its manufacturing sector up the value chain. Greater investment in the world’s advanced, industrialized countries would spur this effort, and that’s exactly what the Chinese government is encouraging companies to do. Highest on the list of investment targets is the United States.  

Beijing’s 2010 Report on China’s Economic and Social Development Plan and its 12th Five-Year Plan offer a glimpse of this strategy. The first document showed Chinese non-financial foreign direct investment (FDI) reached $59 billion in 2010, up 36.3 percent from just a year before. The second document unveiled a policy focus on boosting innovation in strategic emerging industries and upgrading traditional industries. Both will require investment in Western leading-edge, high tech sectors. A report by the Asia Society predicts Chinese investment abroad will soar to $1 trillion by 2020, with much of it going to the United States. In another sign of this trend, a recent survey by the China Council for the Promotion of International Trade (CCPIT) pointed to the United States as the most attractive overseas investment destination for Chinese companies.

It can come as no surprise, then, that at the recent US-China Security and Economic Dialogue – the highest-level bilateral forum to discuss Sino-American relations – the value of the renminbi was overshadowed by an issue higher on the Chinese agenda: a push for more US market access, particularly in the high tech sector. As China’s Vice Finance Minister Zhu Guangyaoput it: ‘We hope that the US will provide a healthy legal and institutional setting for investment by Chinese companies. In particular, we hope that the US will not discriminate against state-owned companies.’

Easier said than done. The United States, citing national security concerns, has shown a queasiness toward Chinese investment that has doomed past corporate acquisitions. Oil company CNOOC’s efforts to buy Unocal, and telecoms giant Huawei’s attempt to own 3Com and 3Leaf, collapsed in the face of vociferous US opposition to placing valuable resources and technologies in Chinese hands. This led to more verbal grenades: The US Congress raised red flags about other, similar investment deals, and Beijing criticized discriminatory and opaque investment policies.

These disputes will only heat up as the US financial sector recovers and expands its credit base, and more Chinese cash from more technologically adept Chinese companies floods into the United States in search of higher corporate profits and access to technology. US natural resources, human resources, and sales will become the targets of increasing competition from Beijing. The US business community may well demand action from Washington to protect its interests. At the same time, local US authorities, who until now have welcomed investment in a desperate struggle for new sources of capital and jobs, may increasingly confront federal objections to the Chinese moves. All this would put real pressure on bilateral relations.

Washington needs to develop a strategic blueprint to avoid a rupture in ties and guide Chinese FDI toward acceptable sectors. Such a policy would clarify any differences between investment from state-owned enterprises with direct government links and that from private companies. It would balance local government needs for investment with federal government regulation and strategic considerations. It would identify opportunities and industries for joint technological development. And it would provide incentives to attract Chinese investment to those sectors in which it is wanted.

The right policy would further integrate China into the global economy and provide US jobs without threatening national security—a win-win situation that would also boost Sino-American collaboration.

Ting Xu is a senior project manager at the Washington, DC-based Bertelsmann Foundation.

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