Lift barriers to mergers and acquisitions

Although Chinese investment would be beneficial to the US, it often falls prey to politics and prejudice

In a bid to inject new vitality into its lukewarm economy and reverse its economic slowdown, the United States has accelerated efforts to promote more inbound industrial investment over the last year.

Global capital flows are currently undergoing enormous changes as more and more foreign direct investment flows from the emerging economies to developed ones rather than the other way. This offers a rare opportunity for China to change its investment imbalance with the US.

For years, the US has concentrated its China-bound investment in high-return risk assets, which have achieved an annual return ratio of around 20 percent, while China's investment in the US has mainly concentrated on the purchase of US national debt, with a per capita yearly return ratio of less than 5 percent.

To reverse this imbalance, China should try to change its foreign asset composition, converting more low-yield outbound debt investment to higher-yield equity investment.

The experiences of other countries indicate that when the per capita GDP of a country reaches $2,000 to $4,750, its foreign investment enters a stage of transformation. For example, Japan's foreign investment structure experienced some major changes in the late 1980s when its current account surplus of international payments surpassed its trade surplus.

In 2011, China's per capita GDP amounted to $4,382, a figure that means it has reached the point when the exporting of commodities should change to the exporting of capital. It is estimated that China's foreign direct investment will reach $1-2 trillion by 2020 if it follows typical investment practice.

Prior to the third Sino-US Strategic and Economic Dialogue, held in May 2011, a report co-authored by the US Association for Asian Studies and the Kissinger Institute on China and the United States at the Woodrow Wilson International Center for Scholars, actively advocated that the US should welcome China's investment. The report argued such investment will help create more jobs in the US, bring benefits to US consumers and even help the US upgrade its infrastructure.

Statistics show that the US' actual investment in China reached $67.6 billion by the end of 2011, compared with Chinese investment in the US that totaled less than $30 billion. So far, the US remains China's largest direct investor while China ranks the 25th among all US-bound direct investors. China's direct investment in the US accounts for less than 1 percent of the US' absorbed investment volumes.

Facts indicate that Washington still adopts a selective openness to investment from China.

In the wake of the global financial crisis, the Obama administration has tried to change the US economy from being debt dependent to industry-driven. Investment from other countries, including China, was expected to help the US promote technological innovations, develop new energy and cultivate new industries. It was the US' hope that large-scale investment from China and other emerging markets would have spillover effects on the US economy.

However, there still exist various kinds of misgivings among US decision-makers toward investment from China. Washington is concerned that opening its investment market to China will result in technology transfers to China and increased investment will facilitate acquisition of US companies that possess some key technologies and intellectual properties.

Under the pretext of maintaining its national security, the US has often placed political restrictions on investment from China. This has in fact become a big obstacle to mergers and acquisitions by Chinese companies in the US, as indicated by the failed attempts made by China National Offshore Oil Corporation, Angang Steel Company, Huawei and other Chinese companies.

The US claims that China's investors are State-owned enterprises that can gain government subsidies and thus enjoy unfair advantages in their overseas assets acquisitions. This it alleges distorts the distribution of global capital and threatens the US' healthy industrial development and free market competition.

Such an allegation ignores the fact that not all Chinese companies are State-owned. In fact, private investors accounted for 74 percent of China's 230 investment moves in the US between 2003 and 2010. The non-transparent barriers set up by the US undoubtedly create a major obstacle to China's US-bound investment.

Despite its operating efficiency and low risk-resistance, China's booming overseas direct investment remains irreversible. The barriers imposed by the US mean it will miss opportunities to gain the maximum return from China's increased overseas investment.

Only by changing its stubborn persistence that inbound foreign investment only focus on its national debt and by introducing preferential policies to facilitate two-way investment with China, can the US attract large-scale investment from China that will help promote its recovery.

The author is an economics researcher with the State Information Center.