US-China Investment Relationship Faces New Realities

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Hong Kong, July 25, 2014 – Escalating tensions between the world’s two biggest economies – the US and China - may hamper growth opportunities warned Daniel Rosen, founding partner of the US consultancy Rhodium Group.

The ongoing maritime tensions in the South China Sea between China and its neighbors have contributed to his somewhat bleak assessment. Addressing Asia Society Hong Kong Center, Rosen cautioned “In 20 years of doing work on the US - China economic relationship, I have never been as concerned about the structural mistrust on both sides of the Pacific. It is not going to blow over like the EP3 crisis, but rooted in a deep breaking apart of confidence on both sides.”

In a speech entitled “Either-Or: New Realities in the US-China Investment Relationship”, Rosen noted that Chinese foreign direct investment (FDI) into the US in 2013 reached USD14 billion, with multiple deals continuing well into this year. This comes as figures from the Chinese Ministry of Commerce indicate that the FDI trend reversed in 2012 with Chinese FDI into the US exceeding US FDI into China, and likely to continue.

Rosen dismissed suggestions that China is investing in the US to gain political influence.

These deals are happening because they have commercial logic, and for virtually no other reason. There is no political motivation for Chinese firms to invest in the US. In fact there are political risks in doing so.”

He noted “I hope the geo-political tension doesn’t get so bad that it would really overwhelm the commercial logic of these deals.”

So why are Chinese firms willing to take risks investing in old economies such as the US, despite much of the growth taking place in developing economies such as China? Rosen explained that China is intent on learning new operating methods from other advanced economies. He added that as cost structures were changing and China’s comparative advantage in this area slipping, Chinese firms were looking to establish their own brands globally, and the most effective way to achieve this was through investing directly overseas.