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Unexpected barriers

(China Daily)
Updated: 2010-11-03 07:56

The rise of China as a major source of foreign direct investment, a natural result of the gradual appreciation of the country's currency and its accumulation of huge foreign exchange reserves, should be a boon to a lasting global recovery.

However, the unjustified hostility that Chinese investors face in some countries, especially those debt-laden rich nations, show the international community is not yet ready to accept China's new role as a global investor.

Unluckily, neither are most Chinese enterprises.

Sitting on a ballooning foreign exchange reserve that reached about $2.65 trillion by the end of September, China has found it increasingly urgent to diversify its overseas investment from low-yielding US Treasure bonds.

Meanwhile, a 20-percent-plus rise of the yuan against the US dollar since 2005 has convinced Chinese enterprises to expand overseas quicker than ever, though few of them can claim adequate knowledge of or expertise in outbound direct investment (ODI). Some domestically famous Chinese companies have taken the lead in acquiring foreign assets in recent years, and, more often than not, have failed to repeat their domestic success.

As a developing country, it is not surprising that China has so far focused most of its ODI on tapping emerging markets or less developed countries, where Chinese enterprises can find an investment climate with which they are more familiar.

Nevertheless, the tiny percentage of US-bound investment as a share of China's total ODI cannot just be attributed to the fact that Chinese enterprises' competitiveness in manufacturing does not guarantee success in an economy dominated by the service sector.

While China's ODI rose to $56.5 billion in 2009, Chinese companies had invested only about $900 million of that amount in the world's largest economy. That would not look so abnormal had investment-led growth not been badly needed to help lift the US economy out of its worst recession since the 1930s.

The unfortunate truth is that, for short-term interests, US politicians are still playing up unwarranted public suspicions about incoming Chinese investment. For instance, in August, 52 US congressmen attempted to block China's first investment in the US steel industry regardless of the obvious contribution such an investment would make to local employment.

If debt-laden rich countries like the United States continue to shut the door on China's ODI while trying to reflate a consumption-led recovery at home, the world economy is simply wasting a chance to avoid an unnecessary double dip.

To address the global imbalance caused mainly by the over-consumption of rich countries, it is high time for them to adopt an "opening-up" policy that facilitates, not frustrates, China's outbound investment that will create demand and fuel growth around the globe.