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    China Business
     Aug 2, 2011

US faces open-door challenge
By Benjamin A Shobert

As China's economy has continued to grow and America's to struggle post the 2008 financial crisis, it has become increasingly difficult to advocate for the good China has done for the US economy.

Earlier justifications about how China kept prices down, thereby improving American's standard of living, have been drowned out over concerns over the loss of jobs and the numerous quality problems of Chinese-made goods. China's geopolitical ascendency and the country's increasing ability to exert influence on issues over which Americans felt they had near hegemony, has only added to these concerns.

It has come as something equal parts surprise and frustration then that, precisely when America most needs additional

investments in its aging infrastructure and stagnant economy, one of the countries with both the most interest and ability to make these investments remains China, a country Americans are coming to view through increasingly jaded eyes.

Ensuring America keeps an open door to Chinese investment is by no means a sure thing. Regardless of party affiliation, the executive branch of American politics has proven to be a fairly consistent advocate for ongoing Chinese investment in the US.

Earlier this summer, at the urging of several key business lobbying groups worried that America's political climate was making foreign investment in the US less likely, President Barack Obama released an official statement as part of the administration's SelectUSA Initiative.

This is designed to affirm the president's interest in, and commitment to, seeking additional investment from foreigners into the US. In this, he stated, "In a global economy, the United States faces increasing competition for the jobs and industries of the future. Taking steps to ensure that we remain the destination of choice for investors around the world will help us win that competition and bring prosperity to our people."

But congressional politics on the matter have noticeably soured over the past three years. In a recent US-China Congressional Commission (USCC) hearing, US Representative Michael Michaud (Democrat-Maine), voiced the concerns of many over whether the underlying economic rationale that has knit America and China together is valid any longer when he stated "I am not sure there is a way to engage economically with China that will protect our workers and businesses from their nefarious trade practices."

For some in congress, the distrust that Michaud speaks of has resulted in what many see as increasingly protectionist positions and proposed legislation.

As one recent example, the congressional steel caucus led by Congressman Tim Murphy (Republican-Pennsylvania) has aggressively attacked moves by Anshan Iron and Steel Group to take stakes in US plants. In a letter to Obama protesting one proposed deal, Murphy wrote "China's state-owned Anshan Iron and Steel Group made a troubling investment in US steel plants that we continue to believe will give China a beachhead to exploit the American steel market, lead to a loss of American jobs, and jeopardize our national security."

Against attitudes of this kind, it has become increasingly problematic to argue not only that the status quo in trade relations between the two countries is acceptable, but that the US should take steps to make itself further attractive to Chinese investment.

Even against these headwinds, Chinese investment in the US is booming. According to numbers compiled by the Rhodium Group, a New York consulting firm tracking Chinese outbound investments, Chinese direct investment in the US has grown 130% annually from 2008-2010 and reached US$5.3 billion last year.

Thilo Hanemann, Research Director for Rhodium, predicts that: "2011 will be another solid year for Chinese investment in the US." According to a June report published by Rhodium Group, "During the first three months of the year [2011], Chinese firms spent an estimated $758 million for 6 greenfield projects and 5 acquisitions in America." Hanemann adds that "the full year figure could match or surpass last year's level, but that this will largely depend on whether several large scale deals close or not."

This would be an impressive achievement given, as the Rhodium Group's June report notes that, "The political climate for Chinese investment in the US remains difficult." According to Rhodium, these difficulties have been compounded in the first half of this year by "Concerns about China's openness to foreign investment and a controversial new Chinese framework for national security screening of inward FDI [foreign direct investment]."

Hanemann also warns that, beyond the existing and reasonably well-traveled national security concerns that have been raised over deals like those by Huawei and China Aviation General Industry, the alleged accounting frauds perpetrated by several high-profile companies listed on the New York Stock Exchange could "raise further questions about corporate governance and transparency in China and seriously damage the brand of China, Inc." Hanemann suggests these problems "could spill over into the debate over China's FDI into the US".

Karl P Sauvant, the executive director of Columbia University's Vale Columbia Center on Sustainable International Investment and author of the recent book Investing in the United States: Is the US Ready for FDI from China?, echoes Hanemann's comments, adding that "while outflows [from China to the US] continue to grow, China appears to be giving preference to investments in the EU because China feels the EU is more welcoming than the US is".

Sauvant went on to reinforce this: "The single most important factor which is holding further investment back is the perception by the Chinese that their investment dollars are not welcome in the US ... this goes back to the CNOOC attempt to acquire Unocal [in 2005]. This received a lot of attention in China."

As the Rhodium Group's principal and China practice leader Daniel Rosen pointed out recently, while the greater quantity of investment deals completed by Chinese firms in the US are those done by private Chinese businesses, the largest amount of dollars invested in the US comes from Chinese state-owned enterprises (SOEs).

The weighting towards SOE investments only serves to further the political concerns these businesses face as they seek to deploy capital in the US. Where American politicians have a general anxiety over Chinese business making investments in their districts and what this suggests about America's economy, many of these politicians become apoplectic at the idea of Chinese SOEs owning assets that have any semblance of an American national security interest.

In fact, raising a national security concern over a Chinese firm's investment in a US company has become one of the easiest and most politically feasible means of dissuading such a transaction from occurring.

Sauvant acknowledges that some of these positions are understandable, if unfortunate: "... the sort of attitudes from members in Congress and the public in general is colored by a broader picture that the US and China are competitors .. so anything that brings the two countries together is greeted with mistrust."

This raises the question of what, if anything, can be done to ensure America does not miss out on China's growing outbound investments in other countries. To Sauvant, " ... what needs to be done is for US policy makers to demonstrate the good that China is doing; specifically, to what extent China's investments create jobs and exports."

At the same time, if China does desire a closer economic relationship with the US, it will be necessary for Beijing to do three additional things.

First, the country must develop and enforce greater standards of transparency both for its SOE sector, but also for privately owned businesses. Doing so would help answer questions which range from what sort of influence the Communist Party has on procurement policy and technology transfer, to more easily addressed questions over whether accounting standards are being held to international standards.

Hanemann adds, "The problem is bigger than just compliance to international accounting standards. It's about whether China's regulations and legal frameworks such as the state secrets law are compatible with Chinese multinationals operating in OECD [Organization for Economic Cooperation and Development] economies."

Second, according to Sauvant, "... Chinese investors need to be educated on how to navigate corridors of power in Washington." This would help Chinese firms regardless of state or private ownership, by running potential investment opportunities up the flagpole and gauging whether the politics in DC will accommodate such a move. Those Chinese businesses most capable of bearing these costs may likely prove to be SOEs, which could further complicate their ability to easily execute meaningful transactions in the US.

Third, Chinese businesses will need to internalize the subjective standards that come with operating in a foreign culture. This challenge can be easily overlooked but, as Sauvant points out, "the cultural challenges can be as significant as the political ones ... how you do business, how you get permission to do certain things ... for this reason you need to educate and help Chinese executives understand how you behave in a highly sophisticated market with established institutional systems like those in the US."

Just as the first wave of American ex-pats heading into China had to adopt management practices that took into account the culture they were operating within, so too will this first generation of Chinese outbound investments need to pay attention to the differences in managerial approaches between US and Chinese companies.

All of these changes beg the question of whether China in fact "must" move to make further investments in the US. The analogy that most easily comes to mind in affirming this belief is that of Japan which, in the early 1980s, set off on an aggressive investing strategy in the US. According to Sauvant, the similarity between Japan's investments then and China's now, is that "in both cases you had a big country growing rapidly in economic strength and that was considered a threat to the established order ... Japan exported a lot to the US and that was considered a threat to US jobs."

But "the dissimilarities were that Japan in the '80s was an ally and from the point of view of Washington was not really perceived as a strategic competitor, but China is."

Hanemann adds that "Japanese companies operated in a slightly different global environment than what Chinese companies face today ... a lot of the initial Japanese investment in the US happened due to tariff barriers, which is something that Chinese companies have not had to face as much of due to the WTO [World Trade organization]. Japanese companies did not have access to this protection and so they had to make local investments earlier."

To Hanemann, the result is that "Chinese companies are lagging behind where their Japanese counterparts were at this stage of development".

In a perverse sense, could additional trade barriers imposed by congress actually increase Chinese investment in the US? Sauvant is quick to quash such an idea: "... tariffs send the wrong message on the part of the US in how it sees the international order on trade evolving ... if we want to stimulate investment in the US by China then we need a more active solicitation by the US government, not tariffs."

This may then be the only question worth answering: does the US still believe it stands to benefit from participation in, and competition from, the globalized world? If so, American policy makers need to embrace the necessary reforms that ensure Washington's fiscal house remains in order, that US workers remain the most productive and best educated the world has to offer, and that in doing both of these together America remains the best place for any country - China or anyone else - in which to invest.

Undoubtedly there remain many policy challenges unique to China's investments in the US. However, the US should be more concerned with those domestic policies it can enact and enforce that ensure America remains an attractive destination for outside investors.

Benjamin A Shobert is the managing director of Teleos Inc (www.teleos-inc.com), a consulting firm dedicated to helping Asian businesses bring innovative technologies into the North American market.

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