US and Chinese local governments boost investment

Top officials from provincial and city levels in both countries continue to strengthen efforts aimed at closer cooperation between the world's two largest economies, reports Ding Qingfen

After news of Chinese investment proposals being turned down in the United States and called threats to US national security, the prospects of Chinese investment in developed nations might seem to be worrisome.

But some positive signals have appeared over the past few weeks, and China is expected to herald a new wave of investment in the world's largest economy, given the strong commitment that Chinese local governments and US states have made to push for closer economic ties.

Since early April, a slew of governors from US states have visited China, leading large-scale business delegations. Their purposes were the same: to promote investment from Chinese provinces in their own states.

And they, of course, got a warm welcome from both the central and local governments in China.

One of those states is California. The largest US state in terms of economy organized a large business team in mid-April, consisting of more than 75 US firms, which traveled to major Chinese cities, including Beijing, Shanghai and Guangzhou.

The eight-day trip was fruitful. California Governor Jerry Brown was welcomed by the Chinese president and premier. As a key part of the journey, Brown also witnessed the signing of a memorandum of understanding to establish the China Provinces and US California Joint Working Group on Trade and Investment Cooperation, in a bid to promote Chinese investment in the US. Six Chinese provinces and municipalities are involved in the program.

"I want to encourage trade and investment exchanges during the trip and deepen economic relations with China," Brown said during his official meeting with Premier Li Keqiang in Beijing.

The newly elected premier responded warmly to Brown's overtures. "California has the longest history in the US in economic relations with China. ... I expect that your visit will promote bilateral economic ties, especially those between Chinese provinces and US states," Li said.

The governors of Iowa, Wisconsin and Virginia also came to China. And they all attended the second China-US Governors Forum, held in Tianjin on April 15 and 16.

During his meeting with the governors, President Xi Jinping said China encourages more frequent exchanges at the China-US provincial and city levels, saying such exchanges have recorded an "unprecedentedly good momentum", adding the two country's local economies complement each other.

China and the US are each other's second-largest trading partner. In 2012, the world's two biggest economies saw bilateral trade of $484.7 billion, nearly 200 times what it was when they established diplomatic relations in 1979.

And the two-way investment has been on the rise. By the end of 2012, cumulative US direct investment in China stood at $70 billion, and China's cumulative outbound direct investment in the non-financial sector in the US reached $10 billion.

But US concerns over national security have been a major challenge to Chinese investment in the nation. A report by two members of the US House of Representatives Intelligence Committee in October cited two Chinese telecom equipment firms, Huawei Technologies Co and ZTE Corp, as posing a potential national-security threat to the US.

"Economic cooperation is a very important part of bilateral relations," said Wang Xu, deputy director-general of Department of American & Oceanian Affairs at the Ministry of Commerce.

"Complaints are meaningless. What we can do is nothing but explore possibilities of enhanced cooperation."

As a major part of the drive, Wang said, it is necessary to deepen and advance the cooperation between the Chinese provinces and the US states.

Li Yong, vice-chairman of International Trade Research Institution of China, said: "We have noticed imbalanced bilateral investment relations."

The recent wave of visits to China by US state officials comes just a month after China elected its new leadership, with both the new president and premier vowing to further open up to the outside world.

Xi, who has rich working experience in local governments, has repeatedly stressed the importance of Sino-US provincial and city-level economic exchanges.

As the then vice-president, Xi paid an official visit to the US in early 2012, and the state of Iowa was a key destination of the trip. In 1983, Iowa and Hebei province became sister states, and in 1985, Xi, then a county-level government head in Hebei, visited Iowa for agricultural projects.

On the sidelines of the Second China-US Governors Forum, Iowa Governor Terry Branstad said China and the US are heralding a new starting point for two-way economic and investment relations, while Chinese provinces and the US states vow to be closer.

"We believe that the two sides will build stronger relations," Branstad said.

Since the global financial crisis, there has been an upsurge in China's outbound direct investment. The nation became the fifth-largest investing nation worldwide in 2012.

China's ODI in the US saw a rapid increase, but the scale is still quite small. In 2012, China's outbound investment in the US gained as much as 66.4 percent from a year earlier, compared with a 28.6 percent growth for the nation's total during the same period.

In addition, various investment barriers set by the US government have continually dampened Chinese companies' confidence in going to the US.

Huang Xingguo, mayor of Tianjin, said State-owned enterprises are the big victims of the restrictive measures, as they are labeled in the US as a group that are strongly supported and influenced by the Chinese government.

"It is already a trend that more Chinese companies go for the US. ... China's State-owned enterprises are a key part of the trend, while US investment is increasingly important for China," Huang said.

But "they are independent entities in the market and have little connection with the central government when it comes to their outbound investment", he said.

"We expect the US to reduce or stop their restrictive measures. We want equal treatment and mutual trust."

Zhang Qingwei, governor of Hebei province, agreed.

"Companies in Hebei suffer from rising investment and trade protectionism in the US, but we strongly suggest dialogue and consultations to deal with the bilateral economic issues," he said.

Different opinions

As for US state governors, China needn't worry as Chinese investment is always welcomed in their states, and it is the US federal government that barred Chinese investors.

"There are different opinions between federal and state governments on the matter," said Branstad, the Iowa governor.

The federal government has its own political concerns when it launches foreign policies, but "we don't, and our focus is to stimulate the economy and create jobs", Branstad said.

"We have no control over such issues, but we will try to influence the federal government to build up the relationship," he added.

Brown, the California governor, agreed, saying that the US federal government has its own foreign policy, which has nothing to do with the state governments.

"We are totally open to China. ... It's about jobs, and it's about investment," he said.

Wisconsin Governor Scott Walker encouraged both sides to deal with the issue in a positive way, although he acknowledged the restrictions. "The best we can do is to continue this partnership," Walker said.

According to a report from Rhodium Group in New York, an organization that monitors global financial trends, although Chinese investment has been rising rapidly in both the US and the European Union, the US has attracted half as much investment as the EU annually in the past two years. The gap was partly attributed to the difference in security concerns between the two, the report said.

But for Dominic Ng, chairman and CEO of EastWest Bank, the US federal government's restrictive measures against Chinese investment is not the mainstream of the bilateral economic relations.

And what is more important is that a "majority of US state governments are more than welcoming to the Chinese investment, as they want jobs and economic growth", Ng said.

"The next decade is the golden period for China's outbound investment in the US, and the nation must hold it firm," he said.

Analysts said China's investment in the US is still quite small. In 2012, China's investment in the US accounted for merely 0.5 percent of foreign direct investment in the US, the largest FDI recipient nation worldwide.

The US federal government defended itself against the Chinese companies' arguments.

During the Second China-US Governors Forum, Hanscom Smith, minister counselor for economic affairs at the US embassy in China, said that the US is an open economy, and "we treat China in the same way that we welcome foreign companies from the other parts of the world".

He added: "We welcome your investment."

Smith is optimistic about the future, saying the US is heralding a new investment wave from China. "In the past many years, we have seen expansionary growth for the Chinese investment in the US, and we believe in the potential for even greater growth in the future."

Chinese investment in the US generates "win-win opportunities for both", he added.

Infrastructure and energy

According to the Ministry of Commerce, during the first three months, the US outperformed all the others, with China's outflow of investment in the nation gaining as much as 104 percent year-on-year, while China's ODI surged by 44 percent to $23.8 billion during the same period.

After meeting a series of Chinese leaders during his brief visit to Beijing in April, US Secretary of State John Kerry called for more Chinese investment in the US.

"One of the things we discussed was the possibility of China investing in infrastructure in the US, since the US has huge infrastructure needs, like water and transportation projects," Kerry told reporters before leaving for Tokyo.

Reports said a major part of Brown's China visit was to explore the possibility of cooperation with China to build high-speed railways in California valued at $68 billion. Brown's team met representatives from Tangshan Railway Vehicle Co and China Railway Corp.

During the signing ceremony of the understanding between California and six Chinese provinces, Wang Chao, vice-minister of commerce, said China will encourage the business exchanges between China's local governments and the US states.

"China will especially promote the Chinese outbound investment in sectors of new energy and infrastructure," he said.

As China is committed to transforming its economic growth model and building up the new version of economy, turning it greener, new energy will be a new hotspot for bilateral cooperation, Chinese local government officials said.

Hebei Governor Zhang Qingwei said the province is seeking cooperation with the US state of Wisconsin, well known for its water conservation, as it is struggling to meet requirements to reduce water use and coal burning this year.

"We are expected to cut water use by one-third this year, as well as transfer alternative energy from traditional coal burning," he said.

"Both obligations contradict the fact that energy demand will soar in the coming years in Hebei due to economic development, and we have to try to work out a solution."

Tianjin Mayor Huang Xingguo said haze and water pollution are the two major challenges facing the city. He said his government is willing to seek cooperation on environmental protection with the states of Wisconsin and Virginia.