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May 2024

China to invest in US infrastructure

Chinese firms are encouraged by both Beijing and Washington to invest in the US infrastructure projects, according to WSJ. To avoid political rhetoric, Chinese firms will only take minority share and remain passive investors. And these projects should be mutual beneficial to the two countries: for China it’s a good way of diversifying its foreign exchange reserves; for the US, these infrastructure projects will bring jobs while not increasing government spending, which helps to improve government budget situation.

In general, this is a smart move on both sides.

China is on buying spree

With $ 2.85 trillion foreign exchange reserves and counting, China has been on a buying spree in the past few years.  From 2007 to first half 2010, China has acquired over 400 firms overseas, or $86 billion, according to Rand Corp.’s Wolf.

China has the urgent need to diversify its investment of its foreign assets since the US dollar is on steady decline. One way of spending the huge foreign reserves is through purchase of natural resources and advanced capital equipment, the latter of which will benefit China via technology spillover, boost China’s labor productivity growth.

For sure, this state-led investment will be inferior to individual-firm’s investment decisions, inevitably bringing some bad returns. China will need eventually relax its control on capital account and bring its surplus of balance of payment account to a more reasonable level.