By Mei Xinyu

With all the concern over the dramatic imbalance in China-US trade, it is expected that the second round of China-US Strategic Economic Dialogue concluded in Washington last week will further open the door for direct investment by China in the US.

The Chinese government is making unprecedented efforts to boost imports and reduce the trade surplus. However, reversing the trade imbalance by increasing Chinese domestic demand or dramatically increasing Americans' savings is a distant possibility.

A more effective means to cut down the surplus in China's current account is to raise overseas direct investment. Overseas direct investment could powerfully upgrade the structure of China's overseas assets.

The State reserve of foreign exchange accounts for the majority of China's overseas assets, and the proportion is climbing quickly.

The managers of the reserve are loaded with risks in the foreign exchange market. They also face the danger of pumping extra money into the Chinese economy which is already troubled by excessive liquidity.

These pressures would be dramatically eased when overseas direct investment is geared up. This use of overseas direct investment has been effectively used by many countries.

In the 1970s, Japan had planned to make huge investments in countries across Latin America, Asia and Africa in an attempt to promote the industrialization of the developing countries to stimulate the export of its industrial equipment.

The Maekawa Report, released in 1986 by an advisory council to then Japanese Prime Minister Yasuhiro Nakasone, suggested that Japan should transform its economy to depend on domestic demand by boosting consumer spending and overseas direct investment to reduce Japan's huge surplus.

China is now enjoying a demographic dividend. A relatively large share of the population has reached the prime age for working. Saving is high for most of the working population and spending on dependents is relatively low.

At the same time, the problem of an aging population is looming. It is very likely in the not-too-distant future that revenues from overseas direct investment will be used to help China's aging population share the economic growth in other countries and regions around the world.

China's developing overseas direct investment is also in the interest of the US. The US has seen an extremely low level of personal savings in last decades, so it has to depend on money inflows to bridge the gap between domestic deposits and its foreign investments.

According to statistics from China's Ministry of Commerce and the National Bureau of Statistics, China's direct investment in other countries and regions was US$57.2 billion by the end of 2005 while the figure from the State Administration of Foreign Exchange was US$64.5 billion.

Considering the fact that many investments are not officially registered, the actual overseas investment from China could well be larger than the government figures.

Within the official figure, Chinese direct investment in the US was a modest US$823 million at the end of 2005.

For Chinese investors, the US is an attractive destination, not only for its huge market, but also for diversified resources like cotton, timber and grain. Yet, Chinese investors have experienced numerous obstacles when they try to invest in the US.

When CNOOC, China's largest offshore oil and gas producer, tried to acquire the US energy company Unocal in 2005, and Lenovo, China's giant in computer technology, bought the PC line of IBM the same year, both Chinese companies felt huge pressure from the US public and interest groups as well as the government in CNOOC's case.

Chinese companies encounter more barriers when they try to penetrate the US financial sector. For more than a decade, Chinese banks have repeatedly been denied permission to set up branches in the US. In contrast, more than 100 business outlets and offices of US banks now operate in China.

The US insurance market is also closed to Chinese investors. Many US states stipulate that only foreign insurance companies with existing operations in other states can open businesses or set up branches. Such stipulation makes it mission impossible for foreign insurance companies to gain a foothold in the US market.

With China's huge potential for overseas direct investment, many countries and regions are trying to lure Chinese investors. At the same time, the US needs foreign capital for sound economic development.

Therefore, it is high time for Chinese investors to get fair treatment on the US market.
?
Before the first China-US strategic economic dialogue last December, US Treasury Secretary Henry Paulson pointed out that one of the three key areas in the dialogue was encouraging both countries' markets to be more open to trade, competition and investment. Since investment and transparency were concerns in last week's dialogue, Chinese investors may soon experience a friendlier environment in the US.

The author is a researcher with the Chinese Academy of International Trade and Economic Cooperation.

(China Daily May 30, 2007)