Capital Idea for China's Wealth

Americans so love the latest, inexpensive "Made in China" products - cars are coming soon - that Chinese firms are flush with export profits. One might think, however, that those companies could easily export that wealth as well, investing the money made in America back into US companies, as the Japanese and Europeans do.

Not so. And therein lies a flaw in China's economic juggernaut, a basic unfairness in its commercial ties, and a major reason for the huge trade imbalance with the US.

Eager as they are to invest overseas, Chinese enterprises face tight controls on outward flows of capital. Last year, they invested only $3.6 billion abroad. That's small noodles compared to the $62 billion foreigners plowed into China's economy in 2004.

To be sure, Beijing's leaders have actively said they want international investment by Chinese companies - their slogan is "going out." One eye-popping example was the $1.7 billion purchase of IBM's PC business by Chinese computer-maker Lenovo last December. Americans would be able to see more of that if China didn't make it so difficult for its enterprises to buy foreign currency.

Keeping wealth at home has long been the goal of China's Communist Party on the dubious theory that the money is needed to create jobs for the rural unemployed and the urban underemployed to keep them from rebellion. Alas, the theory doesn't hold with globalization. To stay competitive, Chinese firms need the ties and experience of offshore investments.

But loosening capital controls even further could expose the weakness in China's economy - its banks. Perhaps up to half are unofficially underwater with bad loans. China needs to let those banks go under or merge, suck up the losses by issuing government debt, and further open capital markets. Other nations, such as Mexico, have taken such a difficult path, and came out the better for it in economic growth.

China's foreign-currency reserves are so swollen from export wealth that it will soon need to either liberalize its capital flows or unpeg its currency from the US dollar. Otherwise it runs the risk of feeding inflation. The Bush administration wants the flexible currency, and wants it soon, to reduce the political heat from Democrats. But letting the currency fluctuate won't have nearly the long-term balancing effect on trade as letting a billion Chinese find overseas outlets for their money.

Of all the economic issues that the US now has with China - textile exports, intellectual piracy, etc. - nothing could better help promote bilateral harmony then granting the Chinese freedom to invest anywhere.

You've read  of  free articles. Subscribe to continue.
QR Code to Capital Idea for China's Wealth
Read this article in
QR Code to Subscription page
Start your subscription today