Monday, May 13, 2013

America's Chinese Dream

My former OECD colleague John West has kindly shared with us his assessment of the opportunities that China's economy provides for the United States.

The US economy is wobbling slowly forward. Europe is just plain wobbling. And China has moved onto a slower growth path.

But China's role in the global economy is also changing fundamentally, providing America with new growth opportunities, a "Chinese dream".

Over the past decade, China has emerged as a major international investor. China's outward investment grew on average 35% a year from 2005-2012. And with investment of $112 billion in 2012, this makes it the world's third largest investing nation after the US and Japan (excluding tax havens).

In the early stages, China's investment was led by state-owned enterprises, and concentrated in the resources sector. China's three state-owned oil firms -- China National Offshore Oil Company (CNOOC), Sinopec and the China National Petroleum Corporation (CNPC) accounted for about one-quarter of China's outward investment by value from 2005 to 2012. Australia has been the largest national recipient of Chinese investment, just ahead of the US. Africa and Latin America have been important investment destinations too. 

But the nature of China's outward investment is now changing. Private enterprises, rather than state-owned enterprises, are now playing a growing role. They are motivated more by tapping new markets, and acquiring new brands and technology, rather than natural resources. 

The US has risen to the top of the list as the most attractive investment destination for such Chinese outward investment, despite concerns about protectionism in American markets, according to a recent report by the Economist Intelligence Unit. 

The EIU has estimated a "China Going Global Investment Index" which balances opportunities (market size, natural resources, intellectual property and manufacturing export opportunities) against risks (political and regulatory risk, cultural proximity, and operational risk). The US leads the pack of attractive international investment destinations by a long way, ahead of Singapore, Hong Kong, Japan, Australia, Canada, Switzerland, Norway, Russia and Germany. America's top place is not surprising given its market size and dynamism, and its wealth of technology and brands.

America's attractiveness as a destination for Chinese investment provides the US with an immense new growth opportunity. It will be important for America to seize this opportunity by being open to such investment, maximizing its benefits, and above all maintaining its attractiveness over time -- especially since the EIU predicts that China's growing investment outflows will even exceed its inflows by the year 2017.

The other new trend is that Chinese consumers are catching up with investors as a driving force in China's domestic economy, as their wages rise and the government puts more money in citizens' pockets.

America's exports to China have already been the bright spot in the American economy over the past decade, growing by some 542 per cent since 2000, while exports to the rest of the world only grew by 80 per cent. And strong growth is set to continue as the EIU predicts that China's imports will grow faster than its exports. 

China is already America's third largest export market, behind only Canada and Mexico, with exports to China reaching $140 billion in 2011 (including Hong Kong). Top American exports to China include agricultural products, computers and electronics, chemicals, and transportation equipment, primarily aerospace and autos. In 2011, China bought 60% of total US soybean exports. And American companies with operations in China had sales of another $169 billion.

At the same time, a lot of noise is still made in Washington about China's alleged currency manipulation. But according to the US-China Business Council there is little evidence that China's exchange rate setting has had much of an impact on the US trade deficit or jobs. The main effect has been that the US imports more from China rather than other Asian countries. And in point of fact, the Chinese currency has appreciated by over 30% against the dollar since 2005.

The USBC argues that America's "action plan" should be to further open China's economy to US exports -- by lowering China's import tariffs on luxury and consumer goods and further increasing market access. Other initiatives that could help US exporters become more competitive in China include directing the US Export-Import Bank to make support of US exports to China one of its top priorities.

In its report on what Americans should know about the US-China commercial relationship, the USBC notes that Americans tend to fixate on the country's merchandise trade deficit with China. But no-one talks about America's $15 billion surplus in service exports with China. 

America has the world's largest services economy. And the key service providers to China include banks and financial institutions, law firms, insurance companies, engineering firms, and providers tourism, business advisory, computer, express delivery, and medical and healthcare services. 

To exploit the potential of its services exports, the US must press for the Chinese market to become more open for US service providers. China maintains market access barriers in services sectors including caps on foreign ownership and licensing restrictions in industries ranging from banking, securities, and insurance to express delivery, healthcare, and product testing.

China's new President Xi Jinping has been articulating a vision of a Chinese dream, with the great revival of the Chinese nation. At the same time, too many people in Washington are worried about China having adverse effects on the US economy, jobs and trade deficit. 

Many Americans are even worried about the Chinese economy overtaking the American. While the total size of the Chinese economy may overtake America's in the next decade, that is mainly because of its enormous population. It is highly unlikely that China's GDP per capita would ever overtake that of America. 

More Americans need to look at the opportunities of the Chinese dream. America can be part of this dream, and exploit a deeper trade, investment and business relationship as a new driver of growth and jobs. 

But for America to realize its Chinese dream requires several things. First, the US must be open to Chinese investment. Blacklisting certain Chinese companies is not helpful. And conversely, the US must make strong efforts to further open the Chinese market for US trade and investment.

But more importantly, the US must maintain its competitive edge to stay attractive for inward investment, and to maintain its strong export performance. This means smart policies on taxation, energy, education, infrastructure, trade, investment and innovation.

This also means inviting China to join the discussions on a "Trans Pacific Partnership" (TPP). True, China's business standards might not yet be at TPP levels. But experience shows that as China does business with American companies, high-quality global standards and business practices are spreading, especially for the rule of law, civic institutions, human resources and environmental practices, and on specific issues like food and product safety in China.

The next chapter in America's illustrious economic history can only be written by taking advantage of the immense opportunities of the Chinese dream.

A big thank you to John West for this excellent article.


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