U.S. capital reflux, the crucial bond between China and the United States began to loosen—a retrospective of changes in Sino-American relations (two)

By He Qinglian on November 29, 2011
(translated by kRiZcPEc)

As said in the previous article, one of the main reasons the Sino-American relations has changed was that one American multinational giant after another withdrew from the Chinese market. China only acknowledged that there had been instances of U.S. businesses withdrawal, but denied that it had become a trend. In its research report, Made in the USA, Again, the Boston Consulting Group (BCG) pointed out that “the [gap of production costs] with China shrinks”, U.S. enterprises had left China and moved back to America. What were once made in China are now made in America. (Source in Chinese)

The Chinese market has become uneasy for American Businesses
Here it is necessary to first analyze the data released the Chinese Ministry of Commerce that reflected an increase in foreign investment. Beijing has claimed all along that foreign investment is still on the increase. From January to September 2011, 20,407 new foreign enterprises had been approved to launch, an increase of 6.24% year on year; and contracted foreign investment amounted to $177.867 billion, an increase of 16.85% year on year. Looking at these data alone and it would be inevitable to misunderstand that multinationals still deem China as the place to invest in. This is not true. The data cited above included investment from free ports like the Virgin Islands, Cayman Islands, Samoa, Barbados, and Mauritius. These places happen to be money laundering havens and transit points for China's capital that has fled the country. The so-called new investments in China from these places were in fact returning capitals of Chinese individuals and Chinese companies that had been bleached in money laundering havens.

As early as four or five years ago, many multinationals from Europe and the United States openly expressed their dissatisfaction with the deterioration in China’s investing environment. For three consecutive years the American Chamber of Commerce in the People’s Republic of China and the European Union Chamber of Commerce in China published studies that reflected businesses from the U.S. and the E.U. had been increasingly worried about China’s protection policy, thinking that their work environment in China would worsen even more.

Foreign companies are dissatisfied in three areas.

First, lack of protection of intellectual property: New regulations forced these companies to transfer their business and technologies to Chinese companies to gain market access. Protection of intellectual property was seriously inadequate, causing massive losses in foreign enterprises

Second, unfair government provisions on acquisition: Foreign companies in China “wished to get equal treatment in open tender.”

Third, merger restrictions imposed upon foreign firms: To set up joint ventures, foreign companies were required to partner with Chinese companies, and the share holding ratio between both sides could only be fifty-fifty. 

U.S. government and E.U. leaders held rounds of talk with the Chinese authorities on investment environment, but no change had been resulted. On top of this, China saw in the last two years a rise in workers’ wages, land cost and continuous appreciation of RMB among other factors that sharply increased the overall production costs.

After costs calculation, U.S. enterprises thought that the advantage of cheap labor in mainland China has ceased to exist, and so they moved back to the United States. In its report Made in the USA, Again, the BCG predicted that by 2020, 15% of U.S. corporations targeting North American market would move back to the United States from China.

Not long ago, Ford Motor Company announced that 12,000 jobs are to be moved back to the United States, where it will invest $16 billion, including $62 billion for purchase and plant equipments upgrade.

BCG senior partner Harold L. Sirkin pointed out that in the next five years the production cost of goods made in certain areas in the United States would only be 5 to 10% higher than coastal cities in China. As the costs reduced, the United States has a productive efficiency edge over China.

U-turn of Goldman Sachs’ attitude toward China
It was not just the industries that withdrew, but the financial sector as well. In recent months, the Bank of America and Goldman Sachs ended their partnership with Chinese banks. Before they took action, the Bank of America and Merrill Lynch sold about half of their 10% share holdings in China Construction Bank.

Of all the American corporations withdrawn from China, Goldman Sachs' exit had a symbolic significance. From what I knew, Goldman Sachs had at one point racked it brain in the attempt to take root in China. To achieve this, the company became the most active strategic investor in China's financial sector. And to get Beijing favor, Goldman Sachs had spent big money to produce clever Public Relations.

These PR techniques resulted in what Beijing liked best: bolstered China's image in international community. Published in 2005, written by Joshua Cooper Ramo, senior consultant of Goldman Sachs, Beijing Consensus was a book that disregarded facts, and went as far in flattery as possible.

That book not only portrayed China’s economic model—one that disregards social justice, human rights and seriously overdrafts ecological environment—as one with the characteristics of equal and quality development, a development model that seeks fairness and high standard growth; it also said that many of the non-economics ideals the Beijing consensus comprises are not only what developing countries should learn from, but will also replace the “Washington consensus” globally.

This somewhat shameless but highly effective way of pro-China PR had widely been used by other foreign banks. In 2004 [for example], the book the Man Who Changed China: The Life and Legacy of Jiang Zemin was published in the English world and generated much attention. Its author, Robert Lawrence Kuhn, Executive Director of Citigroup (bank), is a person who doesn’t speak Chinese at all. This financial practitioner who is neither a biography writer nor a journalist, even less so a specialist in China’s problems would personally put pen to paper and wrote up this biography, the book’s significance in pro-Beijing PR went without saying.

The market that Citigroup spent such big money and effort on pro-Beijing PR to get access to was abandoned by the corporation, only a fool would think this decision was due to the conglomerate’s own problem. I could only say that these banks have already realized one thing: China market has a grim outlook, and from which it’s time to withdraw.

Multinationals: Key allies of China lobby
The withdrawal of multinationals with decisive influence on U.S. political circle means that the crucial link that binds the political and economic relationship between China and the United States has begun to loosen. In the past, given the wide-ranging investment interests in China, these corporations advocated all along for Sino-American friendship and were the main social base of the Panda huggers in the U.S. political and business circles.

For years, multinationals carried out much lobbying at Congress so as to realize and protect their investment interests in China. These corporations had in Washington lobbyists serving specifically this purpose and they formed an alliance. Before China joined the WTO, they keenly called on the U.S. government to unconditionally extend the most-favored-nation trading (MFN; Permanent Normal Trade Relations, PNTR after 1998) status to China. As for the issues of China’s dreadful human rights conditions and its autocratic rule, the main reasons with which they lobbied Congress were, “China is on the path of improvement and is moving closer to Western democracy”, “economic development would be conducive to China’s political reform”, “the spread of the Internet would bring press freedom to China” and so on.

Some of these lobbying efforts benefited China significantly. For example, before the U.S. Congress voted on China’s PNTR status in 2000, hundreds of Multinationals like Boeing formed a group and launched a massive lobby campaign. Participants of the campaign included government relations experts from these companies, industry lobby groups and companies specialized in lobbying that these corporations jointly hired. For almost a year, they held huge number of seminars and talks, instilling in Congress the idea that open trade to China would bring huge business opportunity to American enterprises, and they eventually made it. This collective lobbying cost in total $ 112 million. Before this, the highest spending record of collective action from the US business sector was the creation of the North America Free Trade Zone, which totaled in no more than $ 30 million.

In 2007 the United States promulgated "the People’s Republic of China exports and re-export control policy changes and clarifications and a new Authorization Validated End-User system ", 47 export control products were added. But in the end what prompted the U.S. to reduce the number of controlled products was not the protest from the Chinese government, but rather the lobbying from U.S. multinationals like Boeing, United Technologies and other enterprises.

The Chinese government basically would not openly acknowledge the contributions U.S. multinationals had made to bolster Sino-American friendship. Yet Beijing knew very well that even though it had hired more than twenty professional PR firms to lobby for it in the United States, the effort was far less fruitful than these Multinationals which had deep-rooted connections with local politicians.

After the close tie between the U.S. financial and industrial sectors and China has loosened, the geopolitical conflicts between China and the United States, the inherent conflicts between China and the international system, and clashes between universal values and those of the CCP—the friction factors that had been forcibly suppressed by reason of economic interests will become increasingly evident.

Undoubtedly, the Sino-American relations are facing new changes. Judging from the current situation, the United States seems to have been psychologically ready, while China is clearly ill-prepared for it.