Investment good for both sides

The world's largest economies should promote direct input in each others' businesses and help the global recovery

In recent years, China has emerged to be one of the largest investors in the world. Its ascent has been extremely rapid. As of 2010, China's outbound direct investment stood at $317.2 billion. This is still small in terms of the global total because China only started to invest abroad very recently.

The United States is an important destination of China's overseas investment.

A little-known fact is that US investment in China declined. The figure was $5.4 billion in 2002 but only $2.4 billion in 2011, while Chinese investment in the US will rise further. According to the recently released 2012 Annual Report by the US-China Economic and Security Review Commission, a number of huge acquisitions were proposed in 2012. These included Sinopec's $2.4 billion bid for big stakes in oil and gas developments by Devon Energy, Dalian Wanda's $2.6 billion bid for movie theater chain AMC, and a potential $1.8 billion bid by Chinese aerospace manufacturer Superior Aviation for Hawker Beechcraft.

There are important policy and political complications that will cloud China's rising investment in the US. One source of political complications is that unlike foreign direct investment in China, which mostly funds the establishment of new factories and production facilities, known as greenfield investment, most of the investment deals in the US take the form of acquiring existing assets rather than creating new assets.

Politicians often view asset acquisitions with greater suspicion than greenfield investment. Asset acquisitions contribute to economic growth on the margin by improving efficiency, but they do not add to a country's capital stock, at least not in the short term.

Some of these acquisition deals lead to restructuring that can result in workers being fired. Understandably, in the current economic environment, some people may be alarmed by such deals.

But Chinese investment in the US is not unique in this regard. Direct investment in the US are generally more acquisition oriented. What is unique about Chinese investment is the role of State-owned enterprises. According to one estimate, government-controlled companies accounted for 66 percent of Chinese direct investment in the US between 2003 and 2011. This is historically unprecedented.

It is for this reason that several proposed deals involving Chinese companies in the US have been controversial and why they were unsuccessful. There are two sets of concerns about the State ownership of Chinese investment in the US. One concern is economic, that State-owned enterprises have soft budget constraints and they can outcompete their commercial rivals because of subsidies. The other concern is political. State ownership prevails in a sector of an economy that is most political, for example, energy. On top of that, energy investment are always more controversial than manufacturing investment.