Why is China’s Money Dirty?
Why is China’s Money Dirty?
by Michael A. Santoro, Professor of Management and Global Business, Rutgers Business School
The Wall Street Journal recently reported that private-sector Chinese businesses and investors poured nearly $5 billion into US firms, both large and small, in 2010. Small businesses in particular have welcomed the Asian in-flow with open arms. However, such investments have spawned concerns that this is a move by Beijing to relocate companies to China, taking with them technology, resources and much needed US jobs.
Why the big fuss over such a relatively small amount of capital? $5 billion is a small fraction of the more than the $1 trillion US debt China has purchased and less than 10% of what U.S. companies have invested in China. Why is China’s money acceptable when it buys our debt but “dirty” when it wants to invest?
One problem with Chinese money is that it is hard to tell what is private and what is public. This helps explain why the U.S. government, citing military security concerns, ordered Huawei, a company founded by a People’s Liberation Army officer, to divest from server technology provider 3Leaf.
The broader problem with Chinese investment is that many Americans—and not just China “bashers”--are simply not comfortable with where it came from and what the motivations for the investment might possibly be. The state-fostered business model in China is shaped by rigid party rules, and reforms are still slow to be realized, while the private sector often operates below the radar of legal authority. The U.S. is ambivalent about Chinese investment because we sense quite rightly that it represents a threat to our economic and political values. It is one thing to invest in treasury securities and have the contractual rights of bondholders. It is quite another for China to be our “partner” or even worse our boss.
Since the great debates in the summer of 2000 when the U.S. voted to let China into the WTO, the United States has not given a whole lot of thought to how China would be integrated into the global economy. When the late Senator Patrick Moynihan led the charge in the Senate for China’s admission, the hope that joining the WTO would help change China. However, China has not so much joined the WTO as the WTO has joined China. And so it is certainly now right to ask whether Chinese investment in the U.S. could further cement authoritarian government in China and expand its power to shift the rules of the global political economy to suit its particularistic purposes.
International trade is not supposed to be a zero sum process but that is what China’s rise has turned out to be. Thus far, China has not created any new ideas on global economic leadership. What China has achieved is significant but it has been done almost wholly because of an inexpensive labor pool--often kept cheap by repressing worker rights--that has enabled Chinese manufacturers to make cheap goods and channel them into a well established Western markets protected by strong rule of law.
China’s lack of intellectual property laws and appropriate corporate governance coupled with stealthy technology transfers keeps CEOs of foreign businesses up at night.
But foreign companies have made their own bed in China. One of the key values underpinning the WTO is the rule of law but Western companies in China have, in the words of one foreign lawyer practicing in Beijing “gone native.” Westerners have learned to operate in China through the shadowy world of government connections self-servingly mislabeled by Westerners as “good guanxi.” The end result of this complicity and weakness is that China’s investment capital has become “dirty” money.
The fact that we think China’s investment capital is “dirty” should tell us that we need to go back a few steps and think through how China should be integrated into the global economy. Already, global capital flows are deeply distorted. American businesses need capital to grow and China should be an i