China's Momentous Change: From Center of Trade to Center of Investment

A leading scholar discusses an economic shift that will change China -- and the world.
xiobama.jpg(Susan Walsh/AP)

This post is adapted from a conversation on ChinaFile, an Atlantic partner site. See the full exchange here.

Orville Schell:

When many of us came into the the story of U.S.-China relations, the currency of the realm was politics. When Henry [Kissinger] went to China, there was no economics to deal with. So, it was a political question. Without really noticing it, we've undergone an extraordinary transmigration from the currency of politics to, really, the currency of currency.

We talked about trade at some length, and indeed, China's trade relations with the world are extraordinarily robust -- some $2 trillion. But I think we're sitting at the edge of a very interesting change, that's already starting to happen. It's a shift away from China being the epicenter of trade to being the epicenter of investment. This is going to transform the world.

We've lived through varying sorts of tidal flows of foreign direct investment. It used to be that investment just sort of rained down on the United States and Europe as the logical places to go. Then there started to be a great interest in emerging markets, and that's when many people went off to China and started investing in China.

Now, we're at this other inflection point, where the investment is starting to flow out of China --part of the "going out" policy -- and as companies accumulate capital and move up the value chain, they don't want to just buy a coal mine or an iron mine. They want a brand, they want to be in manufacturing or information systems, and so we're beginning to see this change. 

I think America is not ready for it. I think we've not really thought about it particularly thoroughly because we never have had to think about getting investment. The truth is now that we both need new sources of investment and China is the most logical, promising place from which more of those capital flows will come.

This is something that is going to have a profound impact on U.S.-China relations. Today, China's foreign direct investment in the United States is very small -- on the same level as New Zealand, Denmark. But in some of the work we've done here at the Asia Society, we estimate that there's a potential of from $1 trillion to $2 trillion that will be trying to exit China. The question is, where is it going to go.

This is an area on which we need to concentrate more, because it actually is a win-win proposition. You go to China and there's a tremendous amount of uncertainty about whether this investment is welcome. That largely grows out of several cases -- the Unocal case, ZTE, Huawei. There is a review process, but you should all know that the only grounds on which the United States can reject foreign investment is national security grounds -- extremely narrow. There are very few investments that get turned down. America is one of the most open economies in the world to foreign investment, but that is not always the perception.

ChinaFile is an online magazine published by Asia Society's Center on U.S.-China Relations. 

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