PRINT
EMAIL
COMMENT
DEL.ICIO.US
DIGG
OUR PREMIUM CONTENT
The Kiplinger Agriculture Letter
The Kiplinger California Letter
Kiplinger's Biofuels Market Alert
Kiplinger's Retirement Report
SUBSCRIBER HELP
CURRENT LETTER
No Quick Easing
Of Food Prices
PREVIOUS ISSUES
Joseph Quinlan, a managing director and the chief market strategist of Bank of America, Global Wealth and Investment Management, joined the firm in June 2003. Quinlan is a leading expert on global capital flows and the transatlantic economy. He has been a senior transatlantic fellow (nonresident) at The German Marshall Fund in Brussels, Belgium, since 2003. His research there centers on regional and global trade and investment flows. As a fellow, he regularly briefs congressional leaders on global economic/financial affairs and has testified before the European Parliament.With Treasury Secretary Henry Paulson in China this week to discuss a range of issues related to U.S.-Sino commerce, we thought it would be an opportune time to separate fact from fiction and highlight some key issues that presently define the economic ties between the United States and China:
1. U.S. Foreign Investment in China -- Not As Much as You Think
Rarely does a day pass without the media reporting yet another American firm de-camping the United States for China. The mainland, so goes the consensus, has become the "Factory to the World," leaving U.S. workers to flip hamburgers. Reality is quite different.
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.
2. The U.S. Enjoys a Huge Lead over China in FDI
It is no secret that Chinese investors are quite interested in increasing their direct investment position in corporate America. Equally, it's no secret that any planned purchase of a U.S. company by Chinese investors is subject to a great deal of scrutiny in Washington. Next to America's massive trade deficit with the mainland, China's foreign investment in the U.S. has emerged as a key tension point between the two parties.
That said, it's interesting to note that when it comes to foreign direct investment -- or the corporate presence of the U.S. in China versus China's presence in the U.S. -- the U.S. enjoys an overwhelming advantage over the mainland. In 2006, for instance, U.S. foreign investment in China on a historic cost basis totaled $22.2 billion, a figure well in excess of China's investment stakes in the U.S. The latter totaled just $600 million last year -- a fraction (2.7%) of U.S. investment in China.
In other words -- setting aside trade for the moment -- 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.
3. What really attracts U.S. firms to China? Consumers
Contrary to popular opinion, access to the Chinese consumer remains the key motivation of U.S. firms entering China. Keep in mind that China is not a unified market of 1.2 billion people but a collection of markets with different dialects, varying levels of development, and disparate per capita incomes. These variables, along with many others (the brand-sensitivity of Chinese consumers coupled with intense foreign and local competition) dictate that American firms adapt to local tastes and operate on the ground. Customer proximity, in other words, is key in China.
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.
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.
The contribution of foreign enterprises to China's export ascendancy is nothing short of staggering. From a share of 2% in 1985, aggregate exports of foreign-owned subsidiaries accounted for over half of China's total exports last year. Because of this surge, "Made in China" is not what most people think. Thousands of low-cost Chinese firms are not flooding the U.S. market with goods, displacing U.S. workers in the process. Rather, foreign firms are increasingly leveraging low-cost China to their competitive advantage. Take the iPod for instance. The 30 gigabyte video version is manufactured in China by a Taiwanese firm. It sells for around $224 (wholesale), with China, the master assembler, only receiving $3.70 from the total price. The bulk of the profits flow to Apple, even though the product -- and many others like it -- bears the familiar "Made in China" logo.
5. The U.S. Trade Deficit with China: A Dangerous Scorecard
Much has been made of China's merchandise trade surplus with the United States, which topped $230 billion in 2006. That's a large figure, to be sure, although the figure does not accurately reflect the true nature of bilateral commerce between the United States and China. Missing from this equation are local sales of goods and services of U.S. foreign affiliates operating in China. The latter totaled some $86.5 billion in 2005 (the latest available data), and were 70% larger than U.S. exports in the same year. While U.S. exports to China have soared this decade, surging 139% between 2000 and 2006, foreign affiliate sales have increased at an even pace, by 189%.
Against this backdrop, the trade figures alone -- the favorite benchmark of global commerce -- underreport and misrepresent the true balance of commerce between the United States and China. 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.
6. Capital -- China's Top export to the U.S.
The mainland's exports to the United States run the gamut -- from Barbie dolls to footwear to computers. But perhaps China's most important export to the United States is capital -- or U.S. dollars to be more exact.
Lost on many legislators in Washington that want to punish China for running such a large U.S. trade surplus is this simple yet critical fact: 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.
As a holder of U.S. Treasuries, China's total holdings are now second only to Japan. That said, should the United States opt to curtail or sanction China on account of its exchange rate policy, it may be cutting off a key source of foreign capital -- something the world's largest debtor nation can hardly afford.
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.
Data on foreign affiliate income from the government's Bureau of Economic Analysis corroborate these findings, with U.S. foreign affiliate income in China rising from $1.2 billion in 2000 to $4.7 billion last year. The bottom line: At a time when the U.S. is threatening to impose greater trade sanctions against China, U.S. firms with operations in China are posting record profits.
8. Floating the Yuan -- Be Careful of What You Wish For
As China's trade surplus with the United States has increased over the past year, so has American pressure for China to further revalue its currency. A stronger yuan, according to prevailing logic, would help to redress America's outsized trade deficit with China and bring some competitive relief to U.S. workers threatened by low-cost Chinese labor.
We question this logic but are even more concerned that Washington may be putting the cart before the horse when it comes to China adjusting its exchange rate. More to the point, the United States may be prescribing a currency debacle to China. 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.
9. China's Consumers -- Not All Fast Cars And Fancy Malls
While China has emerged as one of the fastest growing markets in the world for just about everything, times are rather tough for the average Chinese household. Why?
Because the average Chinese household can no longer count on the guarantee of lifetime employment once provided by the Iron Rice Bowl's cradle-to-grave social welfare programs. Many of these social benefits have been scaled back or eliminated over the past decade, saddling the average Chinese consumer with the burden of paying for health care, pensions, education and housing.
Total out-of-pocket health care expenditures by individuals have climbed from 20% in 1978 to roughly 54% today. Meanwhile, only 16% to 17% of the population is covered under any basic government pension scheme; just 14% of China's workforce was covered by unemployment insurance in 2005. The cost of education -- a national obsession -- continues to soar, with many parents finding themselves financially strapped after paying for private tutors, extra classes and other items related to producing the best and brightest in the family. Add to the above soaring housing costs, which have increased as government subsidies on housing have declined. Taking care of the elderly is another financial burden confronting many households.
The bottom line: There is a great deal more economic angst coursing through the average Chinese household than the average U.S. household.
10. Best Investment Opportunity -- Think Pollution
There are multiple ways to invest in the Middle Kingdom, although given prevailing bubble-like conditions in China, coupled with the government's attempt to rein in growth we don't recommend investors invest directly in the mainland.
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. Against this backdrop, the government has set very ambitious environmental goals and objectives, and plans to spend billions of dollars over the next decade on environment-related projects. Doing so means more business and earnings growth for Western multinationals with the cutting-edge technologies capable of cleaning China's air and water. That's just for starters. As China goes green -- a gradual process, to be sure -- the main beneficiaries, besides the Chinese, will be western multinationals with the appropriate technologies to make it all happen.
To read the entire article, click here.
POSTED BY: DD (December 14, 2007 09:43 AM)
These comments make a lot of sense. Everyone plays up the notion that we are in huge amounts of debt, and that we are going to drown in it. This is simply not true. The foreign trade deficit the country is carrying is no larger in percent of gdp than that of 10 or 20 years ago, thus the strain on our financial system is no greater. In addition, the budget deficit is again a singularly small percent of the economic output of the country, although we would all rather have a deficit than a surplus in federal accounts. There is no need to waste money that could be used for investment in the country to sit idle, just to make those of us who do not understand finance, feel better.
It is true that we are losing a large amount of manufacturing, and this is concerning as a strong manufacturing source is important if we ever again get into a large scale war. The country with the greatest manufacturing base usually wins. That being said, Iraq is a small conflict and does not require the type of attention that ww2 did.
I am all for a strong America, but we cannot cry about the past if we are going to be the country of the future. We have to embrace the idea of working smarter, and more efficiently. There are too many of us who now feel entitled to the good life; there are too many victims. Richard, if we are to keep our place in the world we will need to earn it.
POSTED BY: All Roads (December 15, 2007 02:15 AM)
Excellent post. I ahve been writing about many of these same issues for months without anyone paying much attention, so I hope you are able to garner the attention this topic deserves.
R
www.allroadsleadtochina.com
POSTED BY: madmilker (December 17, 2007 10:07 PM)
dang! China go green....when pigs fly! you make 10 points and not say squat! The people in China save 50% of what they make while the whole World expects the American consumer to spend...spend...spend. They already up to 70% of the dang GDP and drowning in debt....and there ain't been one nincompoop the likes of a "Henry Paulson" are a "Ben S. Bernanke" that have stood up and said...."STOP"! Just go to Wal*Marts China web site...they promote the fact that 95% of the items in their China stores come from China and they promote China expor. You don't have to be a rocket scientist to know...if all the US dollars go to China for all that cheap stuff in order to get them back to America....America is gonna have to produce something besides "McDonalds" "Starbucks" "BurgerKing" "Whataburger" and "Chick-fil-A". Oh! for that one poster typing about the debt...how does $48 trillion sound. Check it out on the grandfathers Economic Report web site under total debt.
E-Mail Article
Print Article
|
|
|
|
|
|
|
|
