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  • The Next Big Threat to US-China Ties

    The Next Big Threat to US-China Ties | The Diplomat | July 13, 2011

    By Ting Xu
    The US is lacking a strategy for managing future Chinese investment. With Beijing pushing for more access to its high tech sector, it needs one.

    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.

  • #2
    Not commenting directly on the hi-tech export. (that is what I do for a living by the way)

    At the highest level, the US policy regarding China has been professional and steady. Take the handling of the recent South China Sea dispute for example, it was nicely done. While the US did not arm the PN or get involved “directly” and some have called for, it still reminds Beijing who is calling the shot. It also managed to take all the public “emotion” out of the debate, which can be very poisonous. The way both sides on North Korea also shows a great level of professionalism.

    There are lessons learned to be sure, but both sides seem less emotional. From what I stand, the issue above is small potato.
    “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

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    • #3
      I get the feeling that the underlying reason for the uneasiness is the ongoing "reverse merger" investigation of about 110 Chinese auditing companies. Sure, the right policy has to be set - that's not really a US problem at this point; the Chinese refuse to cooperate, citing "state secret" laws. If they are so eager to invest, why are they not so eager to cooperate?
      "We are all special cases." - Camus

      Comment


      • #4
        because the Chinese law governing investment in US wall street is not in place. Can't have US laws managing Chinese Company list over seas, audit sure -- they hire the big 5 accounting firms just like the next guy. The Chinese government is still learning the rope, so to speak. How many Chinese companies list over seas 5 years ago? 3 years ago?

        110 firms, in the scheme of things, is nothing. I mean how many US company lie about their books? When Enron lies about its book, it is ok. we must have a higher standard with them Chinese companies.
        Last edited by xinhui; 17 Jul 11,, 22:13.
        “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

        Comment


        • #5
          Well, they are only lending more weight to the idea they pursue fraudulent business practices. 110 companies is more than just Enron. At least the companies here can fufill the the minimum requirements of granting access to their records (even if there are gaps and questionable mistakes). Also, I highly doubt that any company listed on the exchanges would be okay with any company (Chinese or otherwise) to compete in the same market playing by different rules.
          "We are all special cases." - Camus

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          • #6
            They are playing by the same rule and indeed many of the "reverse merger" have been reported. my point-- why single out Chinese company that break the rule and not the US one?

            110 companies is more than just Enron.
            that is the point -- you seriously think that 110 minor Chinese companies that no know outside of hardcore investors has a greater impact then Enron? Really?
            Last edited by xinhui; 17 Jul 11,, 23:06.
            “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

            Comment


            • #7
              Its less a rule in the sense of a code of conduct, but more a basic requirement to be a listed entity. If a US company refused to do the same, they would also be investigated.
              "We are all special cases." - Camus

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              • #8
                Originally posted by Dv2 View Post
                Its less a rule in the sense of a code of conduct, but more a basic requirement to be a listed entity. If a US company refused to do the same, they would also be investigated.
                Then, who allowed them to be listed in the first place? A. Audited by a US big 5 auditing firms, B. OK-ed by the OCC (office of currency control) before any foreign companies can be listed in the US. it is the US FCC found out they have problems and report them at a later time how can one claim they don't play by the same rule?
                Don't get me wrong, I am all for fair-play, but the number of US companies that cook their book is greaters than 110 Chinese one listed in NYSE.
                “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

                Comment


                • #9
                  they acquired companies already listed on the exchanges, thus the "reverse merger" element to all of this. The way I understand it was that US auditors didn't catch on until after the fact, that brought the subsequent investigation.
                  "We are all special cases." - Camus

                  Comment


                  • #10
                    They best thing to do is fix the loophole. It is not like people will say no to money.
                    “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

                    Comment


                    • #11
                      Originally posted by Dv2 View Post
                      they acquired companies already listed on the exchanges, thus the "reverse merger" element to all of this. The way I understand it was that US auditors didn't catch on until after the fact, that brought the subsequent investigation.
                      The issue specifically with listing via reverse mergers is the following:

                      - Its actually a backdoor method of getting access to capital markets
                      - Unlike an IPO process, relatively less stringent diligence done via a court sanctioned scheme for reverse mergers
                      - In an IPO, the company has to get an OK from accountants/legal/bankers; all three are on hook to investors if any statements in the IPO document turn out to be false; Not the case in reverse mergers; generally investors take a dim/cynical view on such companies and that is not restricted to Chinese ones

                      This issue has been going on for some time now (6 months or so) with Chinese companies listed in the US and also ones listed on HKSE (google David Webb - prominent HK investor activist). Also Moody's came out with a "red flags" test recently (July 12) on certain Chinese companies specifically and this has exacerbated the situation. (Moody's Raises 'Red Flags' at 61 Chinese Firms - WSJ.com). Don't have access to an open source version of the actual report.

                      Prima facie, it seems overblown/focused - case in point, as most promoter driven Asian companies (certainly Indian ones) would fail the tests (the Moody's Red Flags), but don't seem to get the same negative press as the Chinese ones have (or I have jumped the gun and we will get a Red Flags report on Indian companies soon).

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                      • #12
                        I don't see the red flag on Indian companies coming anytime soon...too much at stake involving US/Indian relations at the moment. Plus, I don't think that the Indians have as much to invest in American markets as the Chinese.
                        "We are all special cases." - Camus

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                        • #13
                          you still don't get it -- instead of "Chinese company", "Indian company", or "Japanese company"

                          How about closing the loophole and prosecute ANY company that breaks the law.
                          “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

                          Comment


                          • #14
                            The world does not function in black and white.
                            "We are all special cases." - Camus

                            Comment


                            • #15
                              Did HKSE specifically target the chinese companies after they experienced the upsurge of fradulent chinese companies? The answer is no. HKSE begins to tighten the requirements for every single reverse merger and investigate them more thoroughly. The results are that HKSE has done a better job than SGX and Nasdaq for the last few years. The world is not in black and white. But you are facing a problem: the choices are you want a permanent fix or a temporary bandaid. Closing the loophole and prosecute any company that breaks the law is a long term solution.

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