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Chinese offshore investment set for take-off

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Chinese direct investment offshore is at the beginning of an exponential take-off, according to a report, with the country’s businesses poised to spend more than $1,000bn accumulating assets around the world by 2020.

However, the report, published by the Asia Society, which focuses on Chinese investment in the US, says political antagonism, especially from Congress, could have a “chilling effect” on flows into America.

Chinese investment into the US is already doubling every year and the failure of the US to capitalise on a wave of future flows will damage its economy and jobs market, the report says.

By the end of 2009, the total stock of Chinese investment offshore stood at about $230bn, on a par with Denmark and slightly higher than Taiwan.

Although exact figures are hard to come by, Chinese purchases of short-term US financial assets, mainly Treasury bonds and other securities, tower over direct investment and already exceed $1,000bn.

Chinese investment offshore began to take off in the past decade, spurred primarily by a drive to secure resources and a need to deploy productively the huge cash reserves accumulated through exports and profits at home.

The Chinese already have a business presence in 35 of the 50 states in the US, with the largest concentration of investments in Texas, New York and Virginia. The largest category by value is industrial machinery.

But China remains a relatively small player overall as an investor into the US, with the world’s second-largest economy still on a par with New Zealand and Austria. The report says many Americans wrongly believe that the heavy state role in the Chinese economy means that investment is driven largely by political subterfuge rather than the profit motive.

The authors, Daniel Rosen and Thilo Hanemann, say the Chinese also need to be reminded that the country’s own opaque political system is a barrier to building trust in the US.

“Americans can hardly be blamed for wondering what the bottom line is if the top executives of China’s state-owned companies are appointed by and beholden to the Communist party, business decisions are routinely subjected to political considerations and firms are larded with loans regardless of their business prospects,” the report says.

“While this opacity may be about shrouding the profit streams of privileged individuals more than anything else, American screeners [of investment proposals] cannot discreetly avert their gaze and Chinese regulators and bureaucrats do.”

The US and China have long discussed the outlines of a bilateral investment treaty but it is not expected to be high on the agenda of next week’s top-level dialogue between the two countries in Washington.

US officials say while the Chinese have complaints about problems investing in America, Beijing recognises that raising such issues would provoke a strong reaction from Washington about the multiple obstacles and restrictions to foreign companies doing business in China.

The report says most of the growth of Chinese investment into the US since 2008 has been in manufacturing.

Real estate purchases have also been growing but are underreported.

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