China `Marginalizes' U.S. as Investments Plunge, Heritage Foundation Says

China’s direct investment in the U.S. plunged in the first half even as its overall foreign acquisitions rose to a record, underscoring the nation’s efforts to diversify its portfolio, according to the Heritage Foundation.

China’s non-bond investments in the U.S. slumped 47 percent to $1.6 billion, while those in the rest of the world surged 34 percent to $29 billion, Derek Scissors, a Washington-based senior fellow at the group, said in a phone interview on Aug. 25.

Slumping direct investment in the U.S. mirrors China’s $51 billion reduction in purchases of Treasuries in the first half as it shifted part of the world’s largest foreign-exchange reserves out of dollars. The U.S. risks being “marginalized” in China’s non-bond investment plans because of opposition to its buying from lawmakers based on “China in our backyard hysteria,” Scissors said.

“China doesn’t want with direct investments to repeat the mistake it made in bond investments, where it’s stuck with the U.S. and can’t do anything about it,” said Scissors. “The U.S. is missing out on non-bond investments in manufacturing and resources for irrational reasons.”

In contrast to the cutbacks made in the U.S., China’s acquisitions in other nations in the Americas and Europe more than doubled, rising to $20.1 billion from $8.4 billion a year earlier, according to the Heritage Foundation’s China Global Investment Tracker that Scissors compiles.

Bond Purchases

China’s purchases of South Korean and Japanese bonds also have soared this year and diversification should be the “basic principle” of reserve management, former central bank adviser Yu Yongding said in an interview this month.

China more than doubled South Korean debt holdings in the first half to 3.99 trillion won ($3.3 billion) and its net purchases of Japanese debt reached 1.73 trillion yen ($20.4 billion), nearly seven times the figure for all of 2005, the biggest year for Chinese buying of Japanese bonds between 2005 and 2009.

China’s holdings of Treasuries fell 6 percent in the first half to $843.7 billion, Department of Treasury data show.

U.S. debt remains the only market big enough for China to invest the bulk of foreign-exchange reserves that reached $2.454 trillion at the end of June, said Scissors.

Chile, Australia

It can diversify its non-bond portfolio and is moving to ensure it isn’t dependent on single countries like Chile for copper or Australia for iron ore, he said.

“China’s worked very hard to diversify its sources of supply and it’s starting to see the pay off,” Scissors said.

Political opposition in the U.S. to Chinese investment in sectors including energy, technology and steel means the U.S. is “completely unnecessarily” missing out on investments at a time when its economy “already has enough pain,” said Scissors.

Opposition from U.S. lawmakers to Chinese investment has derailed deals including a 2005 bid by Cnooc Ltd., the Hong Kong-listed unit of China’s largest offshore energy explorer, to buy California’s Unocal Corp. for $18.5 billion.

“We have a great investment environment but for the Chinese we have a terrible investment environment because we inject so much uncertainty into all their decision making,” Scissors said.

From 2005 through 2009 China has seen 40 deals worth more than $100 million with an aggregate value of more than $130 billion fall through, according to Heritage Foundation data.

Scissors said he tracks Chinese companies’ non-bond investments overseas valued at more than $100 million that are recorded in official government data and other “reliable” sources.

To contact the Bloomberg News staff on this story: Kevin Hamlin in Beijing on khamlin@bloomberg.net

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