Economic adviser Rosen speaks on China’s developing economy

Rosen opened with an explanation of China’s evolving role in the global economy. “We are at a stage where we have a new actor in our economy, in our neighborhood,” Rosen said, “not just as an exporter of goods anymore, but as a direct investor.”

Having long provided goods and services to the United States, the Asian nation’s recent explosion of growth and focused investment in foreign economies has made it a force to be reckoned with. China is now a guest at the global economic table — it no longer just provides the tableware, Rosen explained.

China’s new role as a direct investor should not be examined through a “lens of anxiety, fear and mystery,” Rosen noted, but rather with an attention to the country’s motivations and history.

In the past, China was primarily a portfolio investor, accumulating currencies, stocks, bonds and other financial instruments to obtain a financial return. One of these portfolio investments is China’s stock of foreign reserves, which is currently estimated at $3.5 trillion. But currently the Asian giant is making direct investments in foreign countries, such as mergers and acquisitions as well as “greenfield investments,” by which new businesses are developed on American soil.

While managing portfolio investments is not overly complicated, Rosen explained, large outflows in foreign direct investment such as greenfield investments are generally made by advanced economies. This class of countries has “both the motive — given their wealth — and the opportunity to be global,” he said.

Rosen explained that FDI is not often seen among emerging market economies because their domestic firms are usually still learning how to maximize efficiency within their host country. Direct investment in other countries can also be difficult for firms from emerging market economies because, when a firm is setting up shop abroad, it “does not enjoy the home court conditions and advantages,” Rosen said. In the last decade, however, 10 or 15 emerging market economies — including China — have begun to take up a larger share of total foreign direct investments, signaling an economic shift whose meaning is not yet certain.

But this uptick in FDI by emerging market economies did not start with China, Rosen said — many of the recent expenditures have been made by nations of the former Soviet Union.

“It’s really a very new phenomenon that China is in this game,” he said.

Estimating that the Chinese account for 20 percent of the world population, Rosen said that the country’s GDP was about half of that percentage. Such a GDP and the country’s accompanying growth is almost astounding, he noted, in light of the fact that just six years ago, China’s economy was smaller than that of California. The nation is a major exporter of goods, but it imports almost as many foreign goods. Its longtime exchange-rate policy has focused on keeping the value of Chinese currency artificially low in relation to the dollar, Rosen explained, so that Chinese products appear cheap to foreign consumers.

The enormous increase in China’s foreign direct investments from $20 billion to between $60 billion and $70 billion, Rosen explained, is not due to new governmental policy, but to China’s need for resources to meet its growing domestic consumption.

This hunger for natural resources is being driven by a new “supercycle of urbanization” and is evident in China’s current consumption of 40 to 45 percent of the world market’s supply of aluminum, coal and steel as well as a signifianct amount of the worldwide oil supply, Rosen explained.

Because there are fewer opportunities to meet resource needs within China, Chinese firms are seeking resource deals in other emerging markets, Rosen said.

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China is turning to natural resources in part because its foreign contracting relationships, changing work regulations and rising domestic labor costs are slimming many Chinese firms’ profit margins. The Asian giant became a “manufacturing juggernaut,” Rosen said, after Japanese and Taiwanese firms migrated en masse to China in the wake of the yen’s appreciation in the late 1980s. But in the past decade, China has brought many millions of people into its domestic market and wages have risen by 260 percent.

“It’s not enough just to be the manufacturer to the world,” Rosen explained, because “that’s not actually where the money is made anymore.” As a result, Chinese firms are moving their operations to fields such as natural resources that have higher profit margins.

Turning to the topic of Chinese direct investment in the United States, Rosen noted that “the base of direct investment in this country is European, and will continue to be for a very, very long time.” China’s FDI stock in the U.S. is still relatively small, in part due to the difficulty of complying with U.S. workplace and environmental regulations, he said.

Rosen concluded with a discussion of the proper American policy response to China’s rise as an investor. Critical to coping with this new position, he said, was a defense of the “longstanding American principle of openness to foreign investment.” Any national security and economic stability concerns, he added, could be dealt with using preexisting institutions such as the Department of Commerce and the Committee on Foreign Investment in the United States.

The lecture, titled “Guess Who’s Coming to Dinner?: Patterns and Implications of China as a Direct Investor in the United States,” was sponsored by the Princeton-Harvard China and the World Program.