Chinese outward investment: More opportunity than danger

Unless there is a specific national security consideration, market principles should guide the American response to Chinese outward investment. At home, the determining question should be how the functioning of markets is best served. Overseas, the U.S. should seek to enhance market mechanisms to allay concerns over rising Chinese influence. In neither case should vague political fears play a role.

In bilateral negotiations at the Strategic and Economic Dialogue and other high-level summits, the U.S. should make clear that it is willing to address Chinese concerns about access to the American market. Such a discussion, of course, will occur in tandem with discussion of American concerns, such as the variety of subsidies for state-owned enterprises.

There are also two sets of unilateral actions the U.S. should take.

The U.S. should clarify the role of CFIUS as the sole body that can reject foreign commercial transactions. To make this credible:

• The CFIUS mandate should be extended explicitly to equipment supply contracts and other transactions that can involve national security;
• Congressional input to CFIUS decision-making should be formalized rather than being random and often surprising; and
• CFIUS should work toward a set of guidelines to assist foreign firms in understanding why transactions are rejected even though, for legitimate security reasons, the guidelines will necessarily be incomplete.

The U.S. should respond to China’s increasing economic footprint by increasing its own footprint through the global reduction of trade and investment barriers.

• The U.S. should work with countries in the Trans-Pacific Partnership to establish a superior investment environment, including transparency with regard to subsidies;
• The U.S. should follow the free trade agreement with Colombia and Panama with further trade and investment agreements in Latin America that reduce commercial barriers on all sides; and
• The U.S. should resume its leadership role at the World Trade Organisation, publicly pushing China and others toward a meaningful round of liberalisation rather than toward “Doha-light.”

For its part, China should compel greater disclosure by its state entities while progressively reducing government support for its outward investment.

Conclusion: Small steps first

China has a great deal of money to spend, but without major changes, its outward investment will continue to be confined largely to U.S. government bonds. The PRC’s smaller investment outside of bonds is dominated by state firms and targeted toward natural resources. The geographic pattern changes over time and may soon shift from the current emphasis on South America.

The U.S. draws the lion’s share of Chinese investment but comparatively little outside of bonds. The transparency of U.S. policy toward Chinese non-bond investment should be improved. In turn, Chinese firms must be able to operate properly in the American market, where disclosure requirements are high and competition laws can and should be strictly enforced.