China's Vice President Xi Jinping speaks to leaders from the private and public sectors at a luncheon co-hosted by the US-China Business Council and the National Committee on US-China Relations with the support of several cooperating organizations in Washington, DC, on February 15, 2012. China's heir apparent Xi Jinping told US business leaders Wednesday that the time was ripe for a 'new historical starting point' for relations between the two trade powers. (Image credit: AFP/Getty Images via @daylife)
By Jens F. Laurson and George Pieler,
From Forbes
China is easing its restrictions on foreign investment and the grip on its currency. The minimum threshold for foreign investment has dropped to $500 million, the minimum holding period reduced to two years, and Hong Kong banks are allowed to lend renminbi at market rates to companies set up in a special economic zone.
These are small steps, but prudent ones, in the right direction of freer markets. Together with noises from the Chinese Politiburo about relaxing political vetoes on investment abroad, they allow the dim perception of a day when China might be open to foreign investment.
It fits this picture that Chinese investment in the U.S. (foreign direct investment, not purchases of U.S. debt) rose 12% in 2012 and may hit a new record in 2013… albeit from the low base of one percent of all FDI into the US. It goes both ways: in 2012 the U.S. announced $3.4 billion of bilateral cross-border investment. Some Chinese investments in the U.S. come from state-owned companies; some of the U.S. investments go to Chinese political jurisdictions—not surprising given the Chinese government’s determination to carefully manage all foreign investment and international commerce.
U.S.-China economic relations aren’t all rosy, though. Aside from the perennial U.S. complaints about China manipulating the value of the renminbi to promote exports (the same might be said of the U.S. and its Quantitative Easing), China and the U.S. accuse each other of unfair export subsidies: China calls the whole GM bailout one massive subsidy, and they have a point. The U.S. in turn accuses China of slapping improper duties on American auto imports. Chinese holdings of Treasury debt (of which there is always a lot to buy) are ever-present in debates on budget and trade. China’s sidestepping of Western rules on intellectual property are a permanent source of friction. But the real concern is the risk that the U.S. and China might meet-in-the-middle on the matter of foreign direct investment: China allowing more of it, but the U.S. discouraging it from China.
Security concerns in the U.S. have slowed Chinese investment, as witness the Treasury review of the planned sale of A123, the American battery maker that got a big Obama stimulus grant. Treasury regulations implementing the Foreign Account Tax Compliance Act (FATCA) will scare off some foreign investors because of a 30% penalty(effective in 2014) on firms that don’t wish to lay open their books completely to the IRS (to fish for U.S.-based account holders). The U.S.’s high corporate tax rate (35%,creeping toward 40%) remains uncompetitive when the OECD average is around 25% (China’s is 25%). Though, because the U.S. is still seen safe for investment, one might think worries about tax and regulatory moves that discourage investment at the margin are distinctly non-urgent.
But that can change quickly, as the 2007-2008 real estate bust showed. Right now the U.S. is a safe-haven from economic and political turbulence in Europe and the Middle East, and for both political and economic reasons a more secure bet than China, especially now that China’s economy is slowing. Brazil and Russia, meanwhile, depend heavily on high energy prices to drive growth.
There is a compelling logic to politically motivated cream-skimming aimed at foreign investment. But a more prudent course for both the U.S. and China is to encourage as much outside investment as possible, with as little state interference as possible. China should accelerate and expand its liberal-ish economic experiments by encouraging foreign capital investment. The People’s Republic should let the Hong Kong exchanges trade freely in a wide range of investment vehicles without regard to investor nationality. The U.S., for its part, should relax its FATCA regulations and might think about cutting its corporate tax rate.
A little less demagoguery about exporting jobs and currency manipulations wouldn’t hurt, either. One hopeful sign: The Obama administration has promulgated a new model Bilateral Investment Treaty that, despite extraneous regulatory baggage it comes with, could well help guide U.S.-China efforts in the direct of more, not less, open investment across borders. Launching treaty talks with Beijing based on that model would be a smart move for the U.S. in 2013.
George A. Pieler is an attorney and free-lance writer. Jens F. Laurson is Editor-at-Large of the International Affairs Forum.