EconoMonitor

Efraim Chalamish's Economic Development and Security Blog

Catching Mice and the Chinese Economy Through Western Eyes

It seems as though the more we know, the more interconnectivity there is, the less we understand. Just ask those who deal with China.

I had the pleasure of attending several global conferences recently where people were quite fascinated by the role of the Chinese economy in global markets in light of current economic challenges. “China does not like the world, it needs it”; “Money is Money”; “We do not understand China”; “China is a sleeping giant” – are just some of the statements made by speakers, leaders, and thinkers.

To top it all off, recall the recent comment by many commentators on the importance of Chinese investments in the U.K. economy and its sensitivity: “I don’t care if it’s a white cat or a black cat. It’s a good cat so long as it catches mice”, famously said Deng Xiaoping.

Does it really not make a difference if the investor is a state-owned Chinese entity or, say, a listed Scandinavian multinational corporation?

These statements are a mix of cliché and misinformation. They represent the tension between the strong Western need to generate foreign investment from China to sustain local economies, especially given the ongoing European debt crisis, and the constant fear from the nature, intent, and consequences of Chinese investments. But, more importantly, they tell us quite a bit about the nature of interaction of Western countries and other emerging markets with the Chinese leadership and its economy.

One would think that this should not be alarming. After all, the numbers speak for themselves. In 2010 alone China invested 0.9 Billion Euro in the European Union. Yet, these are modest numbers in global terms and due to the current global economic climate, these numbers can shrink dramatically unless both sides make their efforts to sustain high levels of cross-border investments. What can be done to demolish this Chinese wall?

First, opening offices on the grounds in China can help foreign executives to get closer to customers, suppliers, and business partners, and develop a better understanding of the Chinese business culture. While most international companies did open Chinese branches in recent years there are still many companies that hesitate to open new offices in China exactly because they are afraid of the unknown.

Second, the United States should avoid economic exceptionalism vis-à-vis Chinese investments in the U.S. economy. Many Chinese investors claim that the U.S. administration’s argument that it treats Chinese companies equally is, in fact, untrue. In fact, according to a recent 2011 report by CFIUS, the U.S. agency responsible for screening cross-border foreign investment, investments from Canada, France, and Israel are screened more often. During the period from 2008 through 2010, the United Kingdom alone accounted for 29 percent of all CFIUS filings. Moreover, the approval rate of said Chinese investments tends to be very high. It is important to remember, in any case, that while the approval rate of the investments remains high, an additional screening process can be quite costly, timely, and uncertain. Huawei’s attempt to penetrate the U.S. market in 2007 is a good example.

Moreover, Western governments should find more ways to engage Chinese companies and investors in their policy debate. It is unfortunate that I see more and more forums speaking about Chinese currency, trade, and investment policies without including Chinese speakers or integrating Chinese know-how. If these forums do not exist – we have to create them.

The current political-economic debate in both Europe and the U.S. on the future of Western economies show how fragile our society is. Leaders who are calling the Chinese government and its corporations to increase their investments in their domestic economies in order to improve employment and infrastructure should not ignore the political nature of this public discussion. For most people, it does matter who is catching the mice.

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