China has begun buying foreign assets, specifically high profile US real estate at an increased pace. While sometimes compared to Japan’s disastrous investment in high profile US assets prior to the asset bubble burst in Japan, China’s FDI seems more disciplined based on recent deals. These investments are necessary to soak up the massive amounts of foreign reserves the Chinese have accumulated. With a rise in interest rates and dropping US Treasury bond price imminent, as soon as QE is tapered, the Chinese have real reason to diversify. Chinese officials are beginning to express some trepidation about this impending occurrence.
Multiple agencies are investing in the US, the two largest players being the State Administration of Foreign Exchange (SAFE) and China Investment Corp (CIC). While the latter has a more active investment strategy, competition between the two is leading to more aggressive investment. The US is not overly supportive of these investments. Recently, President Obama blocked the construction of a wind farm off Oregon for national security reasons and the Smithfield Foods acquisition has drawn some scrutiny in the US.
Owing to these controversies, talks regarding a proposed investment treaty have restarted. If successful, both countries would be more open to FDI from the other. This agreement is especially important as levels of FDI in each direction are gradually shifting. While US FDI in China still vastly exceeds Chinese investment in the US, China invested over 500% more in the US last year ($5.15B) than it did in just 2007. While the US continues to invest 10x more in China, the trend towards increased Chinese investment and decreased US investment are clear. Hopefully a trade deal can be achieved helping to open capital markets while protecting strategic industries. More bilateral ties between the US and China should help maintain geopolitical stability with a China, so frequently seen as a the leading competitor for America’s waning dominance of world affairs.
Sources:
http://online.wsj.com/news/articles/SB10001424127887324425204578599913527965812
http://online.wsj.com/news/articles/SB10001424127887324787004578494632401290050
Mark does a nice job of highlighting some important aspects of the FDI interaction between the US and China. It is interesting to consider how tapering alone may effect FDI asset class diversification. As Mark highlights, when the rate of Treasuries and MBS purchases slow, demand for bonds will fall, depreciating their value. This impending result would materially impact China’s accumulated reserves; hence, it is logical that the Chinese government, portfolio managers, and individual investors look to diversify their investment portfolios away from US Treasuries into other securities.
Secondly, the proposed investment treaty would be a phenomenal step for both countries. Although US currently accounts for 10x as much FDI, the Chinese rate of FDI growth is exponential. 500% since 2007 is very significant, a trend that should continue. If the US can foster FDI in America as well as open growth markets to domestic multinationals to invest in, US economic growth should realize fecund returns.
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