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Do American Companies Really Have to Invest in China?

Today, western companies are beginning to invest in China. However, the Chinese government is just as wary of foreign investment as it is of foreign ownership of their resources and their companies. There are a few things you need to know about investing in China.

First, the Chinese market is still a developing market. It will take time for the market to open up to foreign direct investment and for Western companies to truly become “local businesses.” Many American companies have moved full-speed ahead into China, and the government is not happy with this trend. They don’t like foreign companies taking over their markets. As a result, there are some restrictions being put on foreign ownership and investments, and this includes the Chinese stock market.

Second, the government realizes that the only way to stimulate the economy is to make the market work for their companies. That means if the economy is growing too fast or too slow, then they will suffer in the same way as companies that have invested in emerging markets without really considering the long-term consequences. For example, the United States economy was hit by stagflation in the 1990s. This made things quite tough for consumers, but the Chinese government took action and the market rebounded.

Third, there are limits to how much money the Chinese government can allow its citizens to spend. At the same time, they realize that they need foreign currency to support their economy. That’s why the government does not seem willing to allow its citizens to use their hard-earned dollars in risky investments in Western countries. On the other hand, they are perfectly willing to let companies like ours to invest in their country. They just want more control of the investment and aren’t willing to relinquish those interests.

So where does this leave American companies who want to invest in China? It could be a matter of law, a matter of economics or a matter of practicality. Many of the Chinese-owned companies do not have U.S. investors. They depend on Chinese banks and the Chinese State Printing & Imaging Corporation for their credit. Some of them do have Western investors, such as CITIC Bank, which has a great interest in promoting Chinese economy. But as long as those banks continue to have so much debt owed to them by Westerners, there’s little chance that they will be willing to risk those assets away.

On the other hand, it’s possible that there are certain rules that apply only to Chinese companies, but not to Western ones. For example, some believe that state-run banks are totally unsecured, because no collateral is required to invest in them. That would seem to rule out some highly-regulated banks in China like the PBOC and others. But the State Bank of China is fully protected by U.S. law and is very unlikely to default on its debt obligations. In fact, most people in China consider even the safest government banks to be somewhat safer than unregulated private banks because the state guarantees their solvency.

Woodward & Bernstein
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