Tapping the Potential

By Yu Shujun,Business Editor of Beijing Review

Updated: July 23, 2012 NO. 30 JULY 26, 2012

China-U.S. investment needs to be further increased for the benefits of both countries and the world economy

For China and the United States, two-way investment is disproportionately tiny given the size of both economies.

Increasing China-U.S. investment, especially Chinese investment in the United States, will give a strong boost to both countries, especially when the U.S. recovery remains weak and the Chinese economy begins to slow down. More importantly, it will help the world economy recover.

At the U.S.-China Investment Cooperation Forum co-hosted by the China Center for International Economic Exchanges (CCIEE) and the U.S. Chamber of Commerce in Beijing on July 17, officials and business leaders from both countries explored ways to boost two-way investment between the two largest economies.

Small in scale

Increased two-way investment has already promoted economic growth and created jobs in both countries.

The United States has been a major foreign investor in the Chinese market for the past 30 years. According to China's Ministry of Commerce, as of the end of 2011, U.S. investors had set up more than 61,000 companies in China, with paid-in foreign direct investment (FDI) of $67.6 billion, while Chinese companies' direct investment in the United States only totaled $6 billion.

"U.S. investment in China accounts for a small proportion, less than 10 percent, of China's total FDI and China's investment in the United States is even less than that of some small economies, both of which do not match their respective economic size," said Zeng Peiyan, Chairman of CCIEE, a top think tank in China.

Chinese investment in the U.S. market is growing at a rate of about 200 percent a year, said Thomas J. Donohue, President and CEO of the U.S. Chamber of Commerce. "But of $2.3 trillion in FDI in the United States, only 1 percent flows from China," he said.

The proportion of U.S. investment in China is even smaller compared with U.S. total outbound investment. According to Ma Xiuhong, Chairwoman of China Foreign Trade Center and former Vice Minister of Commerce, in 2010, U.S. investment in China accounted for just 0.6 percent of U.S. investments abroad.

The blame for insufficient two-way investment rests on both sides.

U.S. investors appeal to China for access to the service sectors and protection of intellectual property rights, said Zeng.

Chinese companies are not as competitive as their U.S. counterparts in terms of talent, technology, management and marketing, and they lack necessary knowledge of the U.S. political, economic, legal and cultural landscape, he said.

Moreover, some industries in the United States are not fully open to Chinese investors, especially public utilities and infrastructure. U.S. restrictions on technology exports, the safety review of the Committee on Foreign Investment in the United States and the complicated review procedures largely impede Chinese investors.

Removing obstacles

Charlene Barshefsky, senior international partner at WilmerHale in Washington, D.C. and former U.S. trade representative, said that governments and companies of both sides sometimes shoot themselves in the foot.

China needs to resolve problems like capital controls, a slow approval process and occasional lack of financing to the private sector. The United States should solve problems like suspicion of Chinese state-owned enterprises and misunderstanding of Chinese investors' intentions, said Barshefsky.

Companies also create problems for themselves, she said. U.S. companies that come to China are surprised by a lack of transparency or a complicated nature of dealing with government approvals. Chinese companies that come to the United States are surprised by a highly legalistic environment and a requirement for business transparency.

For China and the United States, two-way investment is disproportionately tiny given the size of both economies.

Increasing China-U.S. investment, especially Chinese investment in the United States, will give a strong boost to both countries, especially when the U.S. recovery remains weak and the Chinese economy begins to slow down. More importantly, it will help the world economy recover.

At the U.S.-China Investment Cooperation Forum co-hosted by the China Center for International Economic Exchanges (CCIEE) and the U.S. Chamber of Commerce in Beijing on July 17, officials and business leaders from both countries explored ways to boost two-way investment between the two largest economies.

"All of the parties in the chain—the governments, the companies and the countries—need to think about what it is they have to change and what it is they have to learn," said Barshefsky.

Zhang Ping, Chairman of China's National Development and Reform Commission, said the Chinese Government will further simplify approval procedures and increase its transparency, and strengthen protection of intellectual property rights. China would also like to establish special investment promotion mechanism with some U.S. state governments.

Nicole Y. Lamb-Hale, Assistant Secretary of Manufacturing and Services of the U.S. Department of Commerce, explained the U.S. safety review system. The United States has national security-related investment control, she said. But it applies only to mergers and acquisitions and not to green field investment. Between 2003 and April 2012, Chinese firms invested or announced plans in 180 green field projects in the United States.

Compared with a massive presence of U.S. companies in China, Chinese companies are still less visible in the United States.

"A major impediment to Chinese investment in the United States comes down to a simple lack of understanding," said Donohue.

Many Chinese companies are often unfamiliar with the U.S. political and business environment and they overestimate the problems they will face in investing in the United States.

By the same token, the United States must do a better job of making Chinese companies welcome and aware of the investment opportunities, he said.

Wan Jifei, Chairman of the China Council for the Promotion of International Trade, also said most Chinese companies have limited knowledge of the United States. For example, Chinese investors are only familiar with metropolises like New York, Chicago and Los Angeles, but lack understanding of the diversity of regional economies in the United States.

Meanwhile, some Chinese investors' motivations are politicized in the United States, which has dampened confidence and enthusiasm, he said.

"To realize a higher level of opening up in investment between China and the United States, what's needed is not the further opening of the markets, but an open mind and a broad vision," said Wan.

Wei Jiafu, Chairman of COSCO and a veteran Chinese investor in the United States, suggested Chinese investors get to know American culture, obey its laws, invest in its real economy and learn how to negotiate with labor unions.

Carlos M. Gutierrez, Vice Chairman of the Institutional Clients Group for Citigroup, encouraged both sides to continue sharing best practices and thinking more about people, culture and management aspects.

The supply of trained bilingual executives is going to be one of the major challenges both countries face, said Gutierrez.

Companies that fail in cross-border investment often do so because they misunderstand local culture, he said. Americans like to use the courts of justice and neighbors can still be friends after suing each other, but many companies in China find litigation to be an insult. Cultural aspects can make a massive difference in succeeding in these markets.

Most important, he said, is the art and science of management. "Once you own a company, the big difference will be how you manage it," said Gutierrez. "You can't manage a business in China the way you manage it in the United States."

Opportunities ahead

Although the scale of investment between the two countries is small, the growth potential will be enormous.

Both countries are seeking economic restructuring: Obama has announced the National Export Initiative to double exports in the United States, and the country also aims at developing emerging industries. China is encouraging domestic consumption, and accelerating urbanization and industrialization. All these imply great opportunities for investors, said Zeng.

American companies have absolute advantages in hi-tech and modern services, while their Chinese counterparts have comparative advantages in infrastructure and manufacturing. They should find their common interests during the economic restructuring and give full play to their own advantages, he said.

Zhang said that information, biology, civil aviation and aerospace, high-end manufacturing, energy conservation and environmental protection, and nuclear power will be of great potential for the two countries' investors during China's 12th Five-Year Plan (2011-15) period.

(This article is written by Yu Shujun and published on Beijing Review on July 26, 2012)

http://www.bjreview.com.cn/business/txt/2012-07/23/content_470323_2.htm