A Blog by Jonathan Low


Jan 6, 2013

China Believes in America: When Will America Believe In Itself?

US corporations are sitting on piles of cash, waiting for - depending on who you believe - favorable tax rates, the end of uncertainty, a guarantee of better returns - or a host of other sureties that should make any good capitalist laugh out loud.

As if.

As if there is such a thing as a guarantee or a sure thing or a decrease in risk or a government that isnt contemplating higher taxes.

The Chinese, meanwhile, are looking not for reassurance, but opportunity. And they think they've found it. In the United States.

Compared to what they are accustomed to - along with the rest of the world - the US looks like easy pickings: lots of experienced, well-educated workers who are underemployed; an infrastructure that desperately needs upgrading and a polity, which by global standards has the incentive and wherewithal to pay for it; a tax structure that favors both innovation and investment; and a capacity to absorb new ideas that throw off excess profits.

In short, the only thing that confuses the Chinese, as the following article explains, is why US businesses themselves are not grabbing their inherent advantage and running with it - all the way to the bank. A question they are right to ask - but not to waste too much time worrying about before the opportunity it seized by someone else. JL

Dennis Berman comments in the Wall Street Journal:
Six generations ago, Chinese workers were brought to San Francisco as cheap, pliable labor. Degraded as "coolies," they were thrown into the back-breaking work of mining gold and building railroads.

The Chinese have returned. And this time they are the ones with the capital. Arguably the most intriguing business story of the past month has been taking place back in San Francisco, where a group of U.S. developers is planning the biggest real-estate expansion there since the 1906 earthquake. The group—which includes Lennar Corp., Ross Perot Jr. and others —isn't getting financing from an American bank or pension fund.

No, the money, some $1.7 billion of it, is coming from the China Development Bank, a policy arm of the Chinese state, which normally backs undertakings from low-income housing to the Three Gorges Dam.

As the coolies learned, capital has its prerogatives. And so it is with CDB, which has attached a special proviso. It's asking that China Railway Construction Corp.—a state-owned infrastructure builder with roots in the People's Liberation Army—take part in the projects, which will develop up to 20,000 new homes along two prime positions in the housing-starved city.

It's the kind of arrangement that's initially jarring to the American eye, if not sense of pride.

Just what, for instance, is CDB's own cost of state-subsidized capital? And what is its purpose—to profitably lend money or create Chinese jobs? With CDB, it's always hard to say for sure. The bank didn't return calls asking for comment.

CDB's demand inevitably raises worries about how U.S. know-how is being shipped westward. Chinese learning how to build subdivisions and run movie theaters is probably good for American business in the long term. But that is probably less the case for a wide range of technologies—from genomics to A123's advanced batteries—that have been purchased by Chinese companies in 2012.

And yet the most upsetting thing about the San Francisco plan isn't what it says about Chinese encroachment. It's what it says about U.S. business.

Burned by awful land deals before the financial crisis, American pension funds and banks simply weren't prepared to make such a large loan as the one made by the Chinese, a person familiar with the negotiations says. Nor were they comfortable with the length of the projects, which will go on for two decades, this person adds.

"If you can't attract domestic sources of funding for deals that are this attractive, then when can you? It's kind of a crime you've got to go to China," this person said.

That squares with more disturbing attitudes emanating from U.S. companies, who have largely ditched investment for share buybacks and other forms of shareholder optics.

The numbers make a simple point. U.S. companies have spent the last three years weaning themselves from capital investment. In all, S&P estimates U.S. firms slowed their investment pace by some $175 billion from 2009 to 2011. While those levels have recovered in 2012, there is still a spending hole that hasn't been filled. Companies can "defer maintenance and other new purchases only for so long without hindering future growth," notes S&P analyst Andrew Chang.

And when companies do have cash, they're often electing to spend it on their own shares—not upgrades or research. In all, they've purchased some $274 billion more in shares than they've issued in the 12 months ended September.

Just listen to General Electric Chief Executive Jeff Immelt, who said this week that the fourth quarter had brought an "investment pause" from customers. Or Richard Dreiling, chief executive of Dollar General Corp., DG +5.36%who said customers were "fatigued, they're tired, they're scared. Every time you turn on the television, there's a bunch of guys in a suit who are frowning, telling you that the world's going to go over the fiscal cliff."

The caution, the fear, the awkwardness still seem inescapable as we enter the sixth year since the "subprime" crisis began in 2007.

What would the coolies and old Wall Street men from the 1850s think of us today? Standing on the San Francisco wharf, how would they understand a world in which China seems to believe more in America than America does?


Post a Comment