With more than $3.2 trillion in foreign currency reserves, out of which $1.17 trillion is in US Treasury bonds while also heavily constrained to have just a mere 0.1 percent of the total foreign direct investment in the U.S., China is extremely worried about the safety of the country’s dollar assets. China’s state-run Xinhua News Agency made it quite clear in Beijing’s first official response to the Standard & Poor’s decision to downgrade the U.S. credit rating that:
After historic downgrade, U.S. must address its chronic debt problems [Xinhua, Aug 6, 2011]
The days when the debt-ridden Uncle Sam could leisurely squander unlimited overseas borrowing appeared to be numbered as its triple A-credit rating was slashed by Standard & Poor’s (S&P) for the first time on Friday.
Though the U.S. Treasury promptly challenged the unprecedented downgrade, many outside the United States believe the credit rating cut is an overdue bill that America has to pay for its own debt addition and the short-sighted political wrangling in Washington.
Dagong Global, a fledgling Chinese rating agency, degraded the U.S. treasury bonds late last year, yet its move was met then with a sense of arrogance and cynicism from some Western commentators. Now S&P has proved what its Chinese counterpart has done is nothing but telling the global investors the ugly truth.
China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets.
To cure its addiction to debts, the United States has to reestablish the common sense principle that one should live within its means.
International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currencymay also be an option to avert a catastrophe caused by any single country.
For centuries, it was the exuberant energy and innovation that has sustained America’s role in the world and maintained investors’ confidence in dollar assets. But now, mounting debts and ridiculous political wrestling in Washington have damaged America’s image abroad.
All Americans, both beltway politicians and those on Main Street, have to do some serious soul-searching to bring their country back from a potential financial abyss.
The way out of the uncertainty about the safety of dollar assets has clearly been indicated by Xinhua journalist Deng Yushan today:
Better open the U.S. door wider than scapegoat RMB [Aug 19, 2011]
With U.S. Vice President Joe Biden in China, the yuan has once again become fodder for the headlines of some Western newspapers amid pretty serious reports that the guest from Washington would press Beijing to allow the Chinese currency to appreciate more rapidly.
Any speculation about the alleged undervaluation of the yuan is indeed wide of the mark. In the past decade, so much has been said about the Chinese currency, also known as the renminbi or RMB, in the West, and it is always like beating a dead horse.
Simply put, the exchange rate has never been the real cause of the huge U.S. trade deficit with China.
For starters, the Chinese currency has already appreciated more than 20 percent against the U.S. dollar since China unpegged it from the greenback in the 2005 reform of its exchange rate regime. In the first half of this year, it gained 2.33 percent.
The U.S. trade deficit with China, meanwhile, has persisted. According to Chinese statistics, it was about 114 billion U.S. dollars in 2005, but it increased to over 180 billion dollars in 2010.
Washington and Beijing may quarrel about the “real figures” of the trade deficits by using different calculations. But the plain fact is that large U.S. trade deficits with China continue to exist even as the Chinese currency has appreciated against the U.S. dollar significantly in the past six years.
Meanwhile, China has been making serious efforts to create a more flexible exchange rate regime in a gradual way, taking into account both internal realities and external conditions. History has repeatedly demonstrated that radical exchange rate fluctuations are a recipe for financial and economic calamities.
As the second largest economy next only to the United States and an important powerhouse for global economic growth, China has to maintain financial stability and economic soundness. A volatile Chinese economy is no good news for the United States and the broader world.
Rather than misplaced blame and charged rhetoric, sensible and viable options are on the table for U.S. policymakers to wipe away much of the red ink and catch hold of the elusive balance. Ready ones include Washington relaxing its restrictions on high-tech exports to China and Uncle Sam opening his door wider to Chinese investors.
Washington has its due security concerns while selling products of super-sensitive technologies. However, as U.S. Ambassador to China Gary Locke said last year when he was commerce secretary, some of the export regulations “make no sense” as many items on the control list have already been readily available from companies around the rest of the world.
While reshaping its unnecessarily tight export policy toward China, the United States can also take off its behind-the-times colored glasses and take in more Chinese direct investment so as to better redress the general imbalance of the economic and trade exchangesbetween the two giants.
Chinese investment fully deserves fair treatment. A recent joint study by the New York-based Asia Society and the Washington-based Woodrow Wilson International Center for Scholars points out that China now accounts for a mere 0.1 percent of the total foreign direct investment in the U.S., while Chinese firms in the U.S. are estimated to have created more than 10,000 local jobs.
As many from both sides of the Pacific Ocean have appealed over and again, Chinese investment in the U.S. should be encouraged, and the U.S. process of screening investment for national security concerns should be insulated from political interference.
WASHINGTON – Political fear mongering about Chinese direct investment in the United States could cause the US to miss out on employment and investment opportunities, American scholars said.
The warning was sent by scholars on Wednesday in the form of a recent study on Chinese foreign direct investment (FDI) in the US. Entitled An American Open Door? – Maximizing the Benefits of Chinese Foreign Direct Investment, the study shows that increases in China’s direct investment in the US in the coming decade will help with economic growth and job creation in the country.
Over the past two years, the value of Chinese FDI assets in the US has grown 130 percent annually, said Daniel Rosen, an economist and one of the two authors of the study.
He and economist Thilo Hanemann estimate that in 2010 alone, Chinese investments in the US amounted to $5 billion.
By combining data from professional databases, media reports and industry contacts as well as documenting real-time Chinese investments, they show that Chinese firms have opened businesses in at least 35 states and created some 10,000 jobs.
Profitability is the essential motive behind the Chinese investment, Rosen said, adding that Chinese firms are likely to “place some $1 trillion to $2 trillion in direct investments around the world over the coming decade”.
Stapleton Roy, former US ambassador to China, said that the study offers “informed basis for potential controversy that tends to rise as China shifts its global posture from being a net absorber of FDI to a major provider of FDI, a trend that has begun to emerge in the last few years“.
The study has “brought together the best factual bases for understanding both positive aspects of Chinese FDI in the US and potential risks that exist with FDI in advanced countries”, said Roy, who is director of Kissinger Institute on China and the United States at the Woodrow Wilson International Center for Scholars, which co-sponsored the study with the Asia Society Center on US-China Relations.
The two authors addressed the national security issue that has aroused outcries particularly in the US Congress, saying that the US should continue its screening through the Committee on Foreign Investment in the US (CFIUS), a group headed by the Treasury department with members coming from defense and intelligence departments.
While Rosen defended CFIUS’ role, he did admit that Huawei’s continued failures in major mergers and acquisitions in the US along with other much publicized cases has “already planted seeds of mistrust among Chinese entrepreneurs and Chinese firms that are considering operating in the US or Germany or Canada and someplace else“.
The flow of investment from China to the US constitutes “one of the fundamental changes in US-China relations”, said Orville Schell, director of the Asia Society Center on US-China Relations.
Schell said the US “will suffer” if it cannot find ways to “be as open to Chinese capital as we are to other firms”, even with national security issues considered.
Background(from Xinhua or Xinhuanet sources):
China increases U.S. Treasury holdings in June [Aug 17, 2011]
(Photo: China Daily)
BEIJING, Aug. 17 (Xinhuanet) — China purchased another $5.7 billion of US Treasuries in June, an investment described by one expert as “the best of a bad bunch”, amid growing calls for the country to diversify its foreign reserves.
June was the third consecutive month that China increased its holdings in US Treasury bonds, despite concerns over the safety of dollar assets.
The new purchase boosted China’s holdings to $1.17 trillion as of the end of June, a period when global investors were worried about the outcome of the US debt ceiling debate.
China added to its holdings by $7.6 billion in April and $7.3 billion in May, according to data from the US Department of the Treasury.
As the largest creditor of the US, China has been closely watched for its investments in dollar assets, especially after Standard & Poor’s downgraded the credit rating of the US.
Japan, the second-largest holder of US Treasuries, reduced its holdings by $1.4 billion in June, leaving them at $911 billion. Britain boosted its holdings from May’s $346.8 billion to $349.5 billion in June.
Yuan Gangming, a researcher at the Center for China in the World Economy at Tsinghua University, said the purchasing of US Treasuries reflects China’s limited choice regarding its $3.2 trillion foreign exchange reserve.
“Increasing the holdings despite the slow economic recovery in the US and signs of looming debt problems is ‘choosing the best of a bad bunch’, meaning there are no better places for China to put such a large amount of money,” Yuan said.
Yuan believes that activity in US Treasuries by Japan and Britain has more to do with their own domestic situation rather than the actual value of the bonds.
Although the US economy has been overshadowed by the rating downgrade, the country’s fundamentals in the long term remain strong, Yuan said.
Ken Peng, senior China economist with BNP Paribas, said increasing the holdings in US bonds is not too significant.
“What really matters is the proportion of China’s newly increased US dollar assets (including Treasury bonds) to the newly increased foreign exchange reserves,” he said. “Though there is no way to get the figure, we estimate that the proportion is gradually dropping.”
He said that the key method to address China’s foreign reserves dilemma is to achieve a trade balance.
“If the country’s foreign exchange reserves continue to grow at a fast pace, there is little chance of getting out of the cycle,” Peng said. “You have to do something with the accumulated dollars.”
China’s trade surplus surged to $31.5 billion in July, the highest level in more than two years, as exports rose to a record level, the General Administration of Customs said last week.
Analysts said that while there is not much that China can do in the short term with its foreign reserves, it should nonetheless try to diversify.
“Gold probably tops the list, besides euro-denominated assets and debt of the emerging markets,” said Yao Wei, China economist with Societe Generale in Hong Kong.
“The share of gold in China’s foreign exchange reserves is significantly lower than other countries. The pace of diversification will be subject to the situation in global financial markets and China’s own currency reform.”
Zhu Zhiqun, a professor of political science and international relations at Bucknell University in Pennsylvania, said China should be “more creative” and diversify investments.
“Chinese companies can help failing US businesses through acquisitions and purchases. The US Congress is likely to block Chinese investment in key sectors related to US national security, such as the oil industry, but it is not opposed to Chinese investment in less sensitive businesses,” Zhu said.
(Source: China Daily)
China to allow faster currency appreciation: analysts [Aug 11, 2011]
BEIJING, Aug. 11 (Xinhuanet) — China, backed up by rising exports, is expected to allow a faster appreciation of its currency, which also enables the country to stave off hot money inflows and combat inflation.
The People’s Bank of China, the central bank, set the official medium trading price at 6.4167 yuan against one U.S. dollar Wednesday, marking a new record high of the Chinese currency trading the greenback since Beijing embarked on the yuan’s revaluation reform in July 2005.
Wednesday’s value surge marks a steep rise of 168 basic points from Tuesday’s 6.4335 yuan trading one U.S. dollar. So far this year, China’s currency has appreciated by about 3 percent.
Most Chinese experts predict that Beijing would allow an appreciation of the yuan against the greenback at a magnitude higher than the 5 percent last year.
Foreign trade surplus for July hit $31.5 billion, the highest in two and a half years, thanks to higher-than-expected export growth, particularly to the European Union and emerging economies like Indonesia, Argentina, Brazil and India.
The gains in both exports and imports in July – hitting $318 billion according to the General Administration of Customs – tell that China’s economy remains on a solid track, which will give the authorities in Beijing replenished confidence to raise the value of the yuan, experts say.
The $31.5 billion monthly trade surplus is the highest since February 2009 and has come at a time when the world’s second largest economy faces uncertain outside demand, typically from sputtering economic engines in the U.S and Japan.
As a countermeasure to independent rating agency, the Standard & Poor’s, downgrading U.S. government credit from the top-notch AAA to AA+ for the first time in history, the Federal Reserve came out Tuesday with a surprise policy statement, asserting America will extend its extremely low interest rates through 2013.
The U.S. central bank hinted it could also launch another round of “quantitative easing” by purchasing more government bonds.
Chinese analysts believe that if QE3 is started, a considerable proportion of the generated credit will flow to China, like QE2, attracted by China’s solid growth and higher interest rates.
To thwart the flooding-in of the hot money, Beijing will be forced to increase the value of the yuan, experts say. China’s central bank has amassed a total of more than $3.2 trillion in foreign currency reserves by June this year. The accelerated hot money inflows have ratcheted up yuan supplies to the market as the central bank has to buy them with local currencies.
China faces rising pressure of inflation as inflation has kept building up this year. It reached a 37-month high of 6.5 percent in July.
(Source: People’s Daily Online)
Chinese investment, a real threat to U.S. national security? [Aug 27, 2010]
BEIJING, Aug. 27 (Xinhua) — The United States has repeatedly blocked investment from Chinese companies on national security grounds, a protectionist move that will only harm its own interests, analysts say.
Eight U.S. congressmen recently asked the Obama administration to scrutinize a deal between Chinese telecom equipment giant Huawei and the American operator Sprint Nextelon national security grounds.
It was not the first time Huawei’s attempts to break into the U.S. market have been stymied. Earlier its buyout attempt of 3Com was summarily dismissed by the U.S. government.
Citing national security concerns again, a bipartisan group of 50 lawmakers in July requested that the government investigate an investment project of China’s Anshan Iron and Steel Group(Ansteel), China’s fourth largest steelmaker, which plans to establish a joint rebar venture with a U.S. partner in Mississippi.
“It is inappropriate for some U.S. lawmakers to label regular business behavior as a move that threatens national security,” Yao Jian, a spokesman for the Ministry of Commerce, recently said about Ansteel’s investment plan.
“I hope the United States can create a better investment environment for Chinese enterprises,” he said.
Chinese analysts said the actions were sheer protectionism, adding that national security concerns is only a lame excuse by U.S. authorities, whose true intention is to protect the interests of domestic enterprises and industries.
Moreover, standing up to China’s allegedly unfair trade practices can easily earn the congressmen much needed political chips in the upcoming mid-term election in November, the analysts said.
The setback that Huawei and Ansteel suffered is only the tip of the iceberg. Actually, blocking investment from Chinese companies in the name of national security has morphed into a knee-jerk reaction that could only harm America’s own interests.
Emcore Corporation, a U.S. fiber optics producer, announced in late June that it has abandoned a joint venture in partnership with China’s Tangshan Caofeidian Investment Corporationbecause the Committee on Foreign Investment in the United States “has certain regulatory concerns about the transaction.”
Another State-owned enterprise, Northwest Nonferrous International Investment Company, was also forced to withdraw a purchase of 51 percent stake in Firstgold Corp., a gold mining firm located near a U.S. military base in Nevada.
“Some U.S. politicians still see China through tinted glasses,” said Chen Fengying, a senior strategist with the China Institute of Contemporary International Relations.
In their eyes, China is still a planned economy under a totalitarian regime, she said.
“As a result, they begin to politicize Chinese investment and make it become an issue of security even before Chinese companies carry out any business activities there,” she said, “It is not fair for the Chinese enterprises,” whose regular business behavior has been constantly mischaracterized.
Chen said that compared with the difficulties Chinese firms face in the United States, it is much easier for American companies to invest in China.
According to Ministry of Commerce officials, U.S. companies operating in China report annual profits of at least 80 billion U.S. dollars.
By last June, the total number of U.S. investment projects in China had exceeded 57,000 and the value of accumulated U.S. investment in China reached 61 billion dollars.
According to the American Chamber of Commerce in China’s 2009 White Paper, about 74 percent of American businesses in China made profits and 91 percent chose to stay in China to expand their business.
On the other hand however, the total value of accumulated Chinese direct investment in the U.S. was only 3.1 billion dollars by last June, according to ministry statistics.
Chen said opening the American market wider to Chinese companies will definitely create many more job opportunities in the United States, a fact that U.S. politicians can’t afford to ignore as the country is still haunted by an unemployment rate as high as 9.3 percent.
American politicians should abandon their bias and discrimination against Chinese enterprises and free themselves from the Cold War mentality, Chen said.
“After, solving the problem of unemployment could bring much more tangible benefits for the American people,” she said.
Note that this is in sharp contrast to the current state of Chinese direct investments in other parts of the world:
– China-Qatar cooperation benefits both countries [Xinhua, June 23, 2008]
– Tenth anniversary of China-Africa forum observed in Egypt [Xinhua, Nov 11, 2010]
Chinese direct investment in Africa increased from 210 million dollars in 2000 to 1.44 billion dollars [?yearly?] in 2009, according to Song [Aiguo, Chinese new ambassador to Egypt]. More than 2,000 Chinese enterprises have set up branches in the continent.
– Cooperation benefits all people [China Daily via Xinhuanet, Nov 7, 2011]
Chinese investment in Africa has expanded steadily. In 2008, Chinese direct investment in the continent amounted to 5.49 billion dollars. The existing stock of investment had reached 7.8 billion dollars and more than 1,600 Chinese companies had invested in Africa by 2008, covering a wide range of areas from product processing to agricultural development. Substantial progress has been made in infrastructure cooperation.
Chinese enterprises have undertaken the construction of some major projects in Africa, including the east-west expressway in Algeria, the expansion of the Lobito Port in Angola and the Bui hydro-power station in Ghana, which have been widely applauded by local governments and people. After years of efforts, China-Africa trade and economic cooperation has shifted towards a diversified and interactive pattern encompassing trade, investment, aid and project contracting, playing an irreplaceable role in the economic development of both sides.
– Sino-Russian trade back on fast track: officials [Xinhua, Aug 20, 2010]
Mutual investments also surged this year, as Chinese direct investment to Russia jumped 58.5 percent during the first half of 2010and the Russian investment to China up 18.3 percent, they said.
Russia is interested in continuing cooperation in such areas as electric power, nuclear energy, logistic infrastructure, [Russia’s Economic Development Minister Elvira] Nabiullina said.
Chen [Deming her Chinese counterpart] said Chinese companies are willing to increase investment in Russian enterprises and to take part in their infrastructure construction.
He noted that China would take active measures to promote the import of Russian mechanical and electrical products, and also hopes that in return Russia will open its market to more Chinese cars.
– Full text: Report on China’s economic, social development plan [Xinhua, March 17, 2011]
5. Reform and opening up were further intensified.
We vigorously implemented the “go global” strategy and made further progress in a number of major outward investment projects. Non-financial outward direct investment for the year amounted to $59 billion, an increase of 36.3%.
– Full Text: Report on China’s national economic, social development plan [Xinhua, March 16, 2010]
6. Reform and opening up continued to deepen.
China’ s foreign exchange reserves stood at $2.3992 trillion at the end of 2009, an increase of $453.1 billion year on year. Outbound investment cooperation soared despite the financial crisis, with new progress made in joint exploitation of energy and resources, overseas mergers and acquisitions, contracted projects and labor services. Chinese direct investment (excluding financial sector investment) in other countries reached $43.3 billion in 2009, an increase of 6.5%, and the volume of business in overseas contracted projects amounted to $77.7 billion, an increase of 37.3%.
– Full Text: China’s economic, social development plan [Xinhua, March 20, 2008]
Special Report: NPC, CPPCC Annual Sessions 2008
Chinese enterprises did more investing overseas and increased cooperation with foreign companies, resulting in Chinese direct investment in other countries, excluding financial investment, reaching US$18.7 billion in 2007, an increase of 6.2% over the previous year.
– Hu’s visit to further promote Sino-Vietnamese ties [Xinhuanet, Oct 30, 2005]
By September 2005, Chinese direct investment in Vietnam rose to 710 million dollarswith 346 projects.
The two countries are implementing a series of cooperative projects using preferential loans offered by the Chinese government, such as those in the Thai Nguyen Iron and Steel Plant and the Bac Giang Fertilizer Factory.