Kipinger: The Top 10 Things Every Investor Should Know About U.S.-China Relations

Sunday, December 16, 2007 0:16
Posted in category Invest in China, The Big Picture
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Joseph Quinlan has written a very interesting piece where he debunks a lot of the myths that Americans hear about the deficit, American FDI into China, and the RMB.

According to Quinlan, these are the things everyone should know (Note: I have cut his article quite a bit to pull out keys to his argument and then added my thoughts in italics):

1. U.S. Foreign Investment in China — Not As Much as You Think

U.S. foreign direct investment (FDI) to China has climbed over the past decade, but a little perspective is in order. The $15.5 billion the U.S. has sunk in China this decade equates to only 1.6% of the global total. U.S. FDI in Ireland and Germany was roughly triple the level of investment in China over the same period. On a historic cost basis, China accounted for less than 1% of total U.S. foreign investment in 2006. In 2005, the last year of available data, of total assets of U.S. foreign affiliates, just 0.7% of the aggregate was in China.

Interesting analysis, and I would be interested to see how he accounted for the American firms who used Singapore and Hong Kong as their vehicles.   If they were not counted, I am not sure what the delta is, however HK has historically accounted for the vast majority of FDI spend going into China

2. The U.S. Enjoys a Huge Lead over China in FDI

U.S. firms have far better access to the Chinese market than their Chinese counterparts in the United States. This investment gap represents a strategic competitive advantage to corporate America; hence China’s interest in rebalancing the competitive playing field by acquiring various U.S. companies.

AMEN Brother!  Lenovo and Haeir aside, there is definately a bit of hypocracy going on in this area.  Many Chinese firms, while interested in the U.S., are still choosing other markets (Australia and E.U.) as there is a belief that the hurdles are lower.  Perhaps the fact they can get visas to these countries is a reason for that feeling?

3. What really attracts U.S. firms to China? Consumers

That the Chinese consumer is more important to U.S. firms than the Chinese laborer is evident from the following: More than 75% of total sales by U.S. majority-owned foreign affiliates in China during 2003, the last year of available data, went to local markets. That was substantially above the global norm (64%). Less than 15% of U.S. foreign affiliate sales in China were for export to the U.S.

this is defianttly a recent phenomenon as firms stabilize operations in china, but it is defiantely the way of the future. Exports are getting more expensive, and thus firms are looking at the domestic market.  See posts  Are Trade Stats the Best Measure of Success?  to see the results of the 2006 AMCHAM business climate survey where they really started highlighting this trend

4. “Made in China” — What It Really Means

The mainland has emerged as an exporting powerhouse, with “Made in China” the most ubiquitous signature in the world. Yet lost on many folks is this: A great deal of what China exports to the United States and the world are goods from so-called foreign-invested enterprises, or foreign subsidiaries of various global multinationals.

I hope he gets better traction on this theory than I did in my posts Are Trade Stats the Best Measure of Success? and  Are Trade Stats the Best Measure of Success? – Part 2

5. The U.S. Trade Deficit with China: A Dangerous Scorecard

Missing from the trade debate is the following: The primary means by which U.S. firms deliver goods and services to China is via foreign affiliate sales, not exports. At the end of the day, China does sell more to the United States, but not by the lopsided margin some might suppose.

Linked very closely with #4 and definately requires a lot of education before people will understand this

6. Capital — China’s Top export to the U.S.

China not only provides U.S. consumers with cheap, high-quality goods, it also provides the capital to purchase such goods by recycling greenbacks earned from trade back into U.S. treasuries and other dollar-denominated assets.

this I think is something that is, and should be, a primary concern.  Essentially, the U.S. domestic policies have put the economy in a position where consumers are in essence leasing the stuff they buy (Think of China like GM. you buy their product and get their financing).

To balance this out, the U.S. economy will need to stop spending, start saving, and pay off the debt.  the trade deficit does not help, but it is not the only reason the U.S. is in such a mess

7. The Mainland — An unlikely Source of U.S. Profits

The lopsided nature of U.S.-China trade gives the impression that all the benefits go to the Chinese. That is simply not true. One of the best kept secrets on Wall Street is this: U.S. firms are making tidy sums of money in the Middle Kingdom.

If you look at my previous post Importers, Exporters and Multinationals: A Portrait of Firms in the U.S. that Trade Goods, you will see that in some ways outsourcing is more beneficial to the economy than manufacturing in country.  the firms are more profitable, pay more taxes, and while they may reduce manufacturing headcount… they are adding in other areas (logistics, warehousing, QC, IM/ EX trade docs, etc).

8. Floating the Yuan — Be Careful of What You Wish For

Before China adopts a freely floating currency, the mainland first needs a sound and strong financial sector, in addition to a more liberal capital account. Washington should be advocating financial sector reform in China, rather than narrowly pushing for an adjustment of the currency.

In my opinion, opening up too fast would spell trouble.  It is clear that the market believes the RMB should go lower, but letting it fall too fast will bring side effects that I am sure no one in Washington has thought of or planned for.  I have my theories… but I am keeping them to myself for now.

9. China’s Consumers — Not All Fast Cars And Fancy Malls

Times are rather tough for the average Chinese household and there is a great deal more economic angst coursing through the average Chinese household than the average U.S. household.

Cracking the Chinese consumer market is not easy (as some shops on Nanjing Road have discovered), and it is important to accurately assess the market before entering it.  Sure, china is now the largest luxury market in the world, but that is not the average market.. and that is not sustainable. 

10. Best Investment Opportunity — Think Pollution

One of the best plays on China lies with gaining exposure to large cap U.S./European and Japanese stocks that have the capabilities and core competencies that will assist China in cleaning its environment. China, literally and figuratively, is choking on its own success, and confronts one of the most daunting environmental challenges the world has ever known.

I agree, but more than that, I believe that Chinese firms will show themselves as being leaders in many areas of sustainable development.  Solar, electronic bikes,  waste management, and electronic cars being two of them 

Again, excellent piece of work. You can find the original article here

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