One more reason China and Russia are not quite as welcoming to foreign direct investment these days…
They don't need the money.
Deborah Solomon's interesting A1 Wall Street Journal story about the US Treasury's concerns that the world may not be quite as open to US direct investment as it used to be didn't mention that fact. It focused instead on the "perception that the US — the world's largest recipient of foreign direct investment — is erecting new barriers to foreign capital."
But the fact that both China and Russia save more than they invest and are net lenders — not net borrowers — from the rest of the world seems rather relevant. Both are, I suspect, growing tired of taking funds that foreign investors bring in looking for big — 10, 15, or more — returns and sending them back to the US where they get 5% in the Treasury and Agency market.
That kind of swap may generate dark matter for the US, but it isn't obviously in the interest of the world's emerging economies.
Of course, the fact that they cannot swap equity for equity, and use the funds brought in by private investors to the US to add to their state investment company's holdings of US equities may play a role as well …
One thing I consistently notice in these kinds of stories. US officials — and even more so US businessmen — still tend to talk as if the US is an investor in the world, not the world's biggest borrower.
On a stock basis, that is still (sort of) true. Total US external liabilities exceed total US external assets, but thanks to the strong performance of non-US markets over the past few years, US equity investments abroad are worth more than foreign equity investment in the US.
On a flow basis, though, it is off. The US borrows a ton from the rest of the world every year to finance its current account deficit, that is to say US investment that exceeds domestic savings. Any additional US investment in the rest of the world has to be financed by borrowing even more from the rest of the world.*
And you can sort of see why the United States' creditors might not think that is totally in their interest …
* footnote: US equity investment abroad could also be financed by foreign equity investment in the US. indeed, that generally has been the case in recent years. But in q1, US outward FDI topped inward FDI by about $50b, so the US really has financing its outward investment with debt, including a decent amount of debt placed with the Russian and Chinese government.
UPDATE: A bit more from Naked Capitalism. He raises several good points. Opposition to leveraged buyouts isn't quite the same as opposition to greenfield FDI. And, as Rodrik notes, there will come a point where sovereignty and further economic integration do come into conflict. And for the US, the emergence of large sovereign wealth funds may imply that this point comes sooner rather than later. After all, it is hard to see why Americans are likely to be comfortable with foreign governments taking large equity stakes in the US firms when they generally don't think the US government should take big equity stakes in the US firms … different models of capitalism and all.
Nothing is forcing China, Russia et al to invest in Treasuries/Agencies at 5%. Step aside, quit buying dollars (and injecting unneeded dollar liquidity in the financial system, which ha ha gets recycled back to C and R) and watch US capital exports dry up!
As an aside, have you heard anything on your end Brad about this Russian reval fiasco?
Re: russian reval — not really. anything happen beyond the price movement (i.e. ruble depreciation after the initial small appreciation) that prompts the question. seems from afar that the most likely explanation as that the RCB’s move generated a lot of opposition and they were forced to backtrack. but that is a pure guess.
what are you hearing? and any ideas why capital inflows to russia fell off in June? (per the latest reserves data, which implies net outflows in june after huge net inflows in april and may)
In Russia and China, the Bush Administration has a “rock bottom” credibility problem; whatever the US Treasury complains about will certainly fall on to deaf ears, particularly since the economies of both those respective nations have been booming. Everyone in the rest of the world knows that the Iraq war was an attempted grab for energy resources, with Iraqi oil reserves estimated to be the world’s second largest after Saudi Arabia. The Russians even claim that the Iraq war was started to prevent Chinese firms from signing long term energy exploration contracts with Saddam. Well the days of colonialism are long over. In the economic sphere, the Russians and Chinese would have to be stupid to allow their strategic economic assets to be purchased cheaply with the unlimited quantities of “fiat” US dollars printed by the Federal Reserve.
This week Rosneft has been buying a shedload of dollars, driving $/RUB higher. The as-yet unanswered question is whether $/RUB will sink again next week, or whether CBR will defend the new/old 29.91 level on the basket. If the latter, it would suggest that they pulled the bid simply to allow Rosneft to buy cheap dollars, which would be a textbook case of ‘currency manipulation’ if such things mattered these days. Whats interesting is that the offshore NDF rates have screamed to the left, meaning that the NDF levels are priced on the expectation that the reval will re-emerge. If it doesn’t, there may well be blood on the streets…
why is Rosneft buying $? I would think it would be structural seller of $ (or euro) to the bank of Russia given its resource exports/ domestic payroll …
but i may be missing something. i really need to pay more attention to russia!
I believe it’s a bond maturity. Supposedly they have a new issue coming out soon, which if true could perhaps lead them to reverse this flow, unless of course CBR takes the other side….
thanks — makes sense
Ever since end of World War II, the rest of the world has been following the US trend, perhaps it’s time for Americans to be less “nationalistic” and follow the trend of other nations like Japan, Russia, China (as a goodwill — you might say).
A weak USD may actually increase the US trade deficit. With a weak USD the oil exporting countries will not want to convert their oil into a depreciating asset that is even getting harder to invest with. High crude oil price could just wipe out the reduction in imports of manufactured goods. This will show in another way that the determinant of the deficit is the willingness to borrow to spend.
Macro Man is right - it’s Rosneft buying. They got a lot of money from Yukos in Rur and now they are buying assets from that misterious Prana is USD and also redeeming some debt. It’s temporary distortion, not change of policy.
And according to platts Urals prices have made new all time high on thursday, so really i don’t think anything really changes here.
Consider the effect of a dollar that has lost 40% of its value since 2000/2001. What effect does that have on the value of these investments?
hz — i would assume that oil’s price v say a basket of euro/ $ and yen is a function of global supply and global demand and, absent a policy decision by the oil exporters to reduce supply, i would be surprised if a fall in the $ led to a higher oil price –
there seemed to be an inverse correlation for a while, but 05 went very much the other way ($ increased, oil increased, oil in euros really increased)
finally, if the oil exporters stopped holding $-denominated assets, the US deficit would fall — w/o the financing, the us would have to cut back. the higher oil prices/ bigger us deficit (i.e. us doesn’t reduce its consumption of other things as it pays more for oil) equilibrium only works if the oil exporters finance the us (in my view at least).
“…”Foreign Investors Face New Hurdles Across the Globe,” is misleading in a minor and a major way. The minor way is likely to be apparent to most readers: it oversells the problem it presents… the big way it misleads is failing to distinguish between foreign acquisitions and foreign direct investment…” http://www.nakedcapitalism.com/2007/07/disingenuous-wsj-story-on-government.html
“…China has given us a ton of stuff in exchange for t-bills. If they expropriate US or other rich country FDI, the US cancels their claim to the t-bills and we get the stuff for free. That is to say, China’s huge reserve holding of dollars is just collateral against any appropriation of the FDI being done there…” http://www.marginalrevolution.com/marginalrevolution/2007/07/china-thought-o.html
the weakest part of the dooley, garber and fokekrts-landau argument is the reserves serve as collateral for FDI argument.
in practice, when FDI is expropriated, companies that loose out don’t have a strong claim on their reserves. Look Vennie, russia, Argentina and so on. Hell, even if a sovereign defaults, its reserves are hard to attach … for good reason. moreover, most fdi in china comes from elsewhere in Asia, not from the US — which begs the question of why us treasuries are better collateral for korean and taiwanese investors than korean or taiwanese assets. their argument i think confuses cause and effect. a weak rmb makes china an attractive manufacturing base — which attracts fdi and encourage exports/ leads to a trade surplus. keeping rmb weak in the face of ongoing inflows of capital and a trade surplus requires rapid reserve growth — but the purpose served by reserves is far more maintaining a weak currency than protecting fdi.
incidentally, the way china in practices de facto expropriates foreign investment when it do desires is by allowing the copying their technology and manufacturing practices, not by actually seizing assets– which isn’t something that leads to a claim on china’s reserves.
Someone will finance the US though the same deficit may buy less physical goods. China’s asset - labor, has time value. If not used it is permanantly lost. Oil in the ground is an appreciating asset, on the other hand, as it gets more scarce. The current production has time value - but only if the proceeds can be gainfully invested, at greater return than the rise in value of rising scarcity. But once investment choices get limited — this is bound to happen to anyone whose portfolio gets too large, even if there were no hostile policy to foreign investment and hostile policies will surely exacerbate the situation, what better investment than just simply holding the oil in reserve and producing enough to pay for consumption and domestic investment, when the alternative is to get frowned upon for holding more USD treasury. I doubt the oil exporters will say this outright, the oil consumers hold the ultimate military and political power, after all. But any savvy businessman making the capital allocation decision is bound to think about it.
“the way china in practices de facto expropriates foreign investment when it do desires is by allowing the copying their technology and manufacturing practices”
Very astute! China wants the FDI to upgrade its economy — and it certainly won’t (and won’t be able to) reinvent the wheel. It is willing to pay the price in the loss of value of its reserves, or at least that is part of the calculation. However so far it has not suffered a nominal loss, so the only loss is opportunity cost. It is hard to argue it suffered much there either given the high growth. Though it could have grown even faster, at least according to Wolf. As for the value of current consumption to its consumers, well the populace there is not known to have that much say in state affairs. And its political system does far more damage to its potential than the reserve policy, any way you look at it.