Now comes the difference. In 1890, investment capital flowed from Britain (the more mature economy) to the United States—and on a huge scale. In those days, Britain invested something like 6–8 percent of its national income overseas, with the U.S. as the single largest destination.
Instead of attracting capital, however, China is repelling it. Even accepting the claim that official statistics may undercount U.S. investment, the most rah-rah private consulting firms estimate the total U.S. investment in China since 1990 at about $250 billion—not much more than double the U.S. investment over the same period in tiny Belgium.
China attracts less capital than either the United Kingdom or the United States, two mature developed economies that theoretically should offer fewer opportunities than China. More ominously still: By far the largest source of nominally foreign investment in China—69 percent of all received—is Hong Kong. That money looks more like laundered and recycled domestic Chinese money than true foreign investment.
China’s trade surplus is the flipside of its failure to attract foreign direct investment. It’s an axiom of national accounting that the current account (the trade balance plus earnings on overseas investment) must precisely equal the capital account (net foreign investment in a country).
The story that China’s trade surplus produces China capital surplus could be flipped, to be told as China’s capital surplus produces China trade surplus. And while the word “surplus” sounds like a good thing either way, for a country like China, a capital surplus is actually a very bad thing.
China’s foreign investment is working out exactly as economic theory would predict: It is yielding much lower returns than it would if it were invested in productive enterprise at home. A 2008 World Bank study found that the average return on multinational corporations’ investments in China was 22 percent. American multinationals earned even more, an average of 33 percent. China earns less than 3 percent on its immense holdings of U.S. Treasury.
Congratulations to those successful multinationals operating in China. But notice something: When people are earning 22 and 33 percent on their investment, that implies it takes a very, very glittering incentive to induce them to do something. A 10 percent return would be considered very handsome opportunity in Europe, Japan, or North America—but does not suffice to overcome foreign reluctance to invest in China.
That foreign reluctance is nothing near as ominous as the verdict the Chinese themselves are rendering on their country’s future.
In 1890, when the U.S. was fast industrializing, it was not the dream of every candy maker in Cleveland or every furniture maker in Buffalo to gain a French passport for his children and a second home in Germany for himself. The 19th-century American business class not only earned its profits in the U.S., but it saw its future and its security here as well. When Chinese business leaders invest tens of millions of dollars in second homes in Vancouver or send their granddaughters to Los Angeles to give birth to U.S. citizens, what are they saying about their expectations about China?