US should not be so quick to eschew Chinese investment

By:
Kanika SaigalEuromoney Skew
Published on:

China’s formidable arsenal of outward foreign direct investment – to hit $2 trillion by 2020 – is expected to target assets in the US and other developed countries, potentially providing a substantial boost to lagging economies. For this reason alone, the US needs to tread carefully in its protectionist tone.

The US House Intelligence Committee’s recent report on Huawei and ZTE, the Chinese telecoms equipment suppliers with suspected military links, in essence blacklisted these companies from making acquisitions in the US due to the perceived risk to national security.

Much of the evidence in the report was classified, but its conclusions gave off a distinct whiff of protectionism. Yet can the US afford to snub Chinese investment? A report released earlier this month by Rhodium Group's Thilo Hanemann and Daniel Rosen says that:

"The era of significant growth in outward foreign direct investment (OFDI) from China to advanced market economies has begun. Just as Chinese exports exploded in the last decade – from $250 billion in 2000 to nearly $2 trillion by 2011 – China’s OFDI is poised to skyrocket in the years ahead. We expect China’s cumulative OFDI to grow to between $1 trillion and $2 trillion by 2020. Given the evolving set of motives for Chinese investors, the United States and other developed economies can expect to receive a substantial share of these flows."

In fact, they argue there will be unprecedented competition for Chinese investment in the coming decade as the US’s capacity for consumption declines. Regions including Canada, South America and Europe will be vying for Chinese capital as the shift of global wealth moves from the west to the east. For America to have a fighting chance to secure valuable Chinese investment, there needs to be "institutional change in its investment promotion efforts", says Hanemann and Rosen:
"The traditional hands-off approach is outdated, as officials from the president to local mayors have acknowledged. The United States is no longer unrivalled as a destination for FDI, and a new generation of Chinese investors looking abroad needs local partners and facilitators."  

However, according to the US House Intelligence Committee, one of the main reasons to limit Chinese investment into the US is because the Chinese do not reciprocate investment opportunities within their borders. Thus, the committee advises that:
"Chinese companies should quickly become more open and transparent, including listing on a western stock exchange with advanced transparency requirements, offering more consistent review by independent third-party evaluators of their financial information and cyber-security processes, complying with US legal standards of information and evidentiary production, and obeying all intellectual-property laws and standards. Huawei, in particular, must become more transparent and responsive to US legal obligations." 

The Canadian government might have similar concerns on transparency surrounding CNOOC’s $15.1 billion bid for Canadian oil company Nexen. The government has extended its review period on the deal for another 30 days with a decision due in early November.

However, Lysle Brinker, director of energy equity research at IHS, argues that China will begin to standardize its investment policy to adhere to western benchmarks, if they are allowed to invest in the west. The process needs to work hand in hand with investment, not be a precondition for investment:

"One of the biggest hang-ups is that Canada will not be able to invest as easily into China as vice versa. Although things have been changing of late, to a great extent China remains a closed economy. But if the CNOOC-Nexen deal goes through, this could help China pave the way for more international cooperation and investment into the communist state, which it has been slow to do. Indeed, if China wants to pursue long term strategic goals, for instance in the energy sector, China will need to be more open to international investment as well."
 China Investment Moniter
 
Source: Rhodium Group