Mixed Signals from China

Stephen DeAngelis

February 02, 2007

China threw quite a monkey wrench into the workings of the international security system when it successfully tested an anti-satellite weapon last month. International trade and communications are as reliant on space-based systems as are military forces. Now, according to a Washington Post article by Ariana Eunjung Cha, Chinese leaders are rethinking the value of foreign direct investment as a driver of their economy [“China Gets Cold Feet For Foreign Investment,” 2 February 2007]. Since international trade is the fuel that fires China’s sizzling economic growth, these recidivist activities appear antithetical to China’s long-term interests. Cha writes:

“Since the mid-1990s, China has aggressively courted foreign investment, crediting capital from abroad with helping it become a world economic power. In recent months, however, the Chinese government, saying it needs to protect homegrown companies from unfair competition, has thrown a multitude of new regulations at foreign firms seeking to do business in China. While some believe the new restrictions — which affect several sectors, including real estate, retailing, shipbuilding, banking and insurance — may be only temporary measures to control growth, others worry that there’s a larger political issue: that economic nationalism or even protectionism is rising.”

It’s almost laughable to read that China is seeking “to protect homegrown companies from unfair competition,” since that is a charge more often aimed at Chinese business practices. International lawyer Dan Harris notes in his latest blog posting [Faking It Bric (Brazil, Russia, India, China) Style]:

“The International Chamber of Commerce just released its survey of businesses on the countries with the best and worst environments for intellectual property protection and China came in last place, followed by Russia, India, and Brazil. The US, UK, Germany and France came out on top.”

The U.S. and Europe also continue to attract a lion’s share of foreign direct investment. If China and the other BRIC countries aspire to join the economic elite, they would do well to emulate the kind of policies that have pushed those countries to the top. Cha continues:

“The Chinese government steadfastly maintains that it still embraces the policy known as gaige kaifang— literally, reform and opening up — initiated by Deng Xiaoping in 1979. However, several Chinese officials have in recent months called foreign investment ‘malicious’ and promised ‘severe measures to curb and punish hostile takeovers aiming to monopolize the Chinese market.’ China remains the largest recipient of foreign direct investment among developing economies. But after a decade when heavy capital flows from abroad were credited with bringing the country out of poverty, that investment is leveling off. According to the Commerce Ministry, foreign investment in 2006 decreased 4 percent from the year before, to $69.5 billion. The United States’ piece of that dropped 6.4 percent, to $2.87 billion. (China receives additional investment from American companies that, for tax purposes, have their headquarters in places like the Virgin Islands.)”

The new regulations, according to Cha, were the subject of cabinet-level meetings held last November between the U.S. and China. Some of the rise in economic nationalism can be attributed to the highly controlled Chinese Internet. Blogs against foreign investment have been allowed to stir nationalist emotions, but there don’t seem to be many Chinese blogs providing a more even view of the benefits of FDI.

“For instance, the … Carlyle Group tried in 2005 to buy an 85 percent stake in Xugong Construction Machinery, a market leader. Xiang Wenbo, chief executive of a state-owned rival company, wrote on his personal blog that the government shouldn’t permit the sale of valuable strategic assets like Xugong. After he and other opponents waged a months-long online campaign against the deal, Carlyle scaled back its offer, taking a 50 percent stake. Albert Keidel, a former U.S. Treasury official now at the Carnegie Endowment for International Peace, said there seemed to be a sense among ordinary Chinese citizens of ‘how much are we going to allow foreign companies to continue to take advantage of us?’ Egged on by a public concerned about the growing influence of foreign companies, the Chinese government in July placed restrictions on the purchase of real estate by foreign individuals and institutions. The next month, it put a moratorium on foreign acquisitions of brokerages and limited the competitiveness of foreign-funded retail companies. In November, the government issued new guidelines for cross-border mergers and acquisitions, making it more difficult for foreign companies to be involved in deals with companies related to ‘national economic security’ or those that have a ‘famous trademark’ or ‘traditional brand.’ In a report issued last month, the Organization for Economic Cooperation and Development complained that the new regulations were so vague that they ‘may have a serious unintended discouraging effect on investments.'”

Economic nationalism has always played well to domestic audiences, whether in Beijing or Boise, because (like politics) all economics is local. Visionary leaders have always had to resist this populist approach and help others see the larger economic picture. Cha concludes his article by noting that some economists believe that the issue is being overblown. Some would argue that they are simply following the theories of Harvard economist Dani Rodrik that I discussed in yesterday’s post. There are no simple answers when it comes to globalization. Change always results in winners and losers. The goal of good policy is to create more winners than losers.