Last month, while the world watched in awe the spectacle of the Beijing Olympics and the numerous world records that were set, China was quietly setting an economic record of its own - the country’s trade surplus reached a monthly high of $28.7 billion, a 14.9% jump from the same time last year. China’s trade surplus with the United States also rose 16.6% to $17.5 billion. While these numbers may cause concern in some quarters, China’s trade surplus, combined with massive capital reserves, means an additional increase in liquidity and incredible opportunities for companies and governments that recognize the potential benefits of this liquidity.
China’s current position as the world’s cash king makes many institutions and individuals nervous. For some, it represents a perceived shift in the balance of economic power, while for others, the prospect of enduring another period of foreign acquisition of national assets may be difficult to stomach. But unlike the mid to late 1980’s when Japanese investment in the United States reached an all-time high, causing significant political consternation, this period of Chinese liquidity need not cause such xenophobic reactions. Indeed, increased Chinese direct investment in the United States would benefit both economies and would have the additional effect of helping to stabilize one of the world’s most important bilateral relationships.
So far this year, China’s reserves have increased by an average of $80 billion per month. If that pace continues, China will have added approximately $1 trillion to its foreign reserves by year end. Much of those reserves are in US dollars, but with the US economy is such disarray and the US dollar in decline, it is in China’s interest to do something to help stabilize both. One strategy that China is pursuing is to promote direct investments abroad by Chinese corporations and sovereign wealth funds by relaxing restrictions on private capital outflows. The creation of the $200 billion sovereign wealth fund China Investment Corporation (CIC) is an example of China’s commitment to foreign direct investment (FDI).
From China’s perspective, the promotion of FDI is a long-term strategy that is but one aspect of the country’s broader strategic interests and development. FDI gives China the opportunity to secure critical raw materials, increase overall corporate profitability and scale of production, and to diversify trade.
From an American perspective, allowing FDI may, on the surface, appear to be a short-term solution to the current economic crisis. But upon closer examination, direct investment from China represents more than just an economic bailout and an infusion of cash into a cash-strapped economy. It also means increased bilateral ties and possible improved political, economic and cultural exchanges in a relationship that is vital to the health and stability of the world’s economy.
A recently released report from the Asia Foundation, entitled America’s Role in Asia: Asian and American Views, advocates just such an increase in ties between the two countries. Written by 20 distinguished Asian and US foreign policy experts after a year of high-level discussions, states that “although relations with China are generally constructive, the US must, in order to minimize threats to American security and prosperity, maintain a constructive response as China continues to rise.” In other words, the US must engage with China and build an ongoing positive relationship rather than build barriers to trade and investment as a reaction to a perceived “threat of Chinese economic domination”.
The report goes on to state that “Asian leaders calculate that enmeshing China in a web of agreements and dialogues encourages peaceful and cooperative behavior and a greater degree of openness.” Interconnectedness brings about peace and prosperity, so if this can be achieved between the US and China, China’s relationships in the region and in the rest of the world will likely stabilize as well.
So while the Olympics represented China’s symbolic entrance onto the “world stage, it was also just a first step in an increasingly necessary improvement in political, economic and cultural ties between China and the rest of the world. The United States, as the world’s economic leader, must recognize the opportunity that allowing increased foreign direct investment from China represents. It is an opportunity to alleviate short-term capital needs, improve long-term economic prospects and increase bilateral ties in one of the world’s most important relationships. China has the capital. The US has the assets. It’s time to bring them together.