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The Chinese are coming! (maybe)

Chinese bullet train. Photo by Occam http://www.flickr.com/photos/ockam/3615674274/

A couple of articles this week indicate that the Chinese economic presence in the US may be increasing in the near future.

First, an article in Tuesday’s Wall Street Journal reported that “Chinese companies are increasingly looking to invest in the US, and state and local governments are scrambling to win a share of the money.” This investment might take the form of big deals, such as Zhejiang Geely Holding Group’s purchase of Volvo from Ford for $1.8 billion, or smaller deals in a range of sectors across the country.

China’s foreign direct investment (FDI) in the US has increased threefold to $1.24 billion in 2008 from 2002. However, this absolute level is tiny compared with other Asian-Pacific countries’ investment in the US, such as Japan ($260 billion), Australia ($64 billion) and even India ($4.5 billion). Yet, Clarence Kwon of Deloitte Services LP’s Chinese services group predicts: “I think within the next two to three years, we’ll see a big wave” of Chinese investment.

The Journal writes that Beijing “seeks to nurture home-grown multinationals,” and that many Chinese firms “are casting abroad for new markets, technology and product lines.” It could have added, but didn’t, that another reason for China to encourage FDI in the US is diversify its huge holdings of foreign reserves and US debt.

Second, today’s New York Times has an article about how China may be “supplying the technology, equipment and engineers to build high-speed rail lines” in the US. It notes that the Chinese government has signed a preliminary agreement with the state of California and General Electric (GE) to assist in constructing rail lines.

In China, the expansion of high-speed “bullet” train lines - which reach up to 215 miles per hour - is impressive. According to GE, China will spend $300 billion in the next three years on rail routes, compared to the US government’s $13 billion during the next five years. By late 2011 or early 2012, a high-speed link from Beijing to Shanghai will cut the trip from 10 to four hours. That’s about the same distance as between New York and Chicago, and the Amtrak train takes 18 to 19 hours.

China’s economy is still smaller than America’s, and in fact it can rightfully be described as a developing country (especially given the large population and the national income per person). But the possible Chinese investment in US rails highlights almost a reversal of roles.

Under the discussed agreement with California and GE, the Chinese railways would license its technology to GE which “has little experience with the electric locomotives needed for high speeds”. Furthermore, the deal specifies that 80 percent of the components have to come from American suppliers, and labor for assembly would have to be done in the US. These are the kinds of deals that developing countries usually try to make when big Western multinationals, holding superior technology, want to invest in their countries (and indeed, China apparently learned their train-building techniques via licensing agreements with Japanese, German and French companies). And in another sign of reversal, China is offering to provide financing for the rail venture in California.

In the 1980s there was a nativist backlash against Japanese FDI in the US as the dollar fell against the yen, as there was also a more generalized anxiety about American decline. With the tensions building up between the US and China now over China's currency (which I wrote about here) and other issues, it remains to be seen whether a wave of Chinese economic activity in the US will be the focus for any similar anxieties about US decline.

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