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From West-East Investment to East-West Investment

While many decry the spate of recent purchases of American and European assets by Chinese investors as potentially dangerous and destabilizing, the current period of East-West investment is merely part of the cycle of investment that flows back and forth from West to East and East to West.

In the 1980’s, Japan’s appetite for all things American was famous. Japanese investors bought stakes in everything from U.S. corporations to landmarks such as Rockefeller Center in New York. The shock and debate about this first round of East-West investments was played out in the media among politicians and pundits for most of this period. Eventually, Japanese conglomerates quietly sold off these high-profile assets as the Japanese bubble burst in the early 1990’s.

Throughout the 1990’s and early 2000’s, a more “traditional” pattern of investment took place as both Europeans and Americans recognized the tremendous growth potential of the Asian economies, especially China. This wave of West-East investment seemed to restore the “natural order” of the world economy: capital from the West and goods, services and resources from the East.

But as the U.S. budget deficit and trade deficits grew in the early part of the new century and as inflation in Europe has gradually taken hold, so has the potential for a new wave of East-West investment. With 3,500 investment projects in the United States and Canada, more than double the number from 5 years ago, China’s presence in Western economies is likely to increase in the short-term. It is also likely to cause alarms to go off in the halls of power and create another storm of protest and possible protectionism.

The establishment of a Chinese sovereign wealth fund, China Investment Corporation (CIC), valued at $200 billion in September, 2007 has further provoked fear in some quarters. This new investment tool gives skeptics more ammunition in their campaign to limit foreign investment in Western economies.

Recently, Jesse Wang, chief risk officer at CIC, addressed these concerns by calling sovereign wealth funds “the by-product of globalization” and “ a way for emerging markets to better utilize their resources.” He also admitted that nationalistic and protectionist movements were to be expected.

China’s recent acquisition of a sizable stake in British Petroleum has fanned these nationalistic sentiments, even though the British government itself is attempting to “woo” additional Chinese investment.

UK Chancellor of the Exchequer Alistair Darling recently said, “ We welcome the creation of Chinese sovereign wealth funds and their potential for investing in our country. London attracts more Chinese inward investment than any other location in Europe.”

All of this is occurring as senior Chinese government officials expect a deceleration in GDP and investment growth in 2008. Xu Xianchun, deputy director of the National Bureau of Statistics said that GDP growth in 2008 was expected to slow from the 11.9 percent rate of 2007. Chinese exports are expected to be affected by slowdowns in the U.S., European and Japanese economies while investment will be affected by tighter monetary policy.

Despite these possible developments, the current trend of East-West investment will continue in the short-term, despite protests and appeals to nationalistic and protectionist sentiment by some members of Western societies. Certainly however, West-East investment will rebound in the long-term as the next wave of economic growth waits on the horizon.

Didier J. Rault is Founder and Chairman of International Finance Capital, a Hong Kong and New York based company specializing in “West to East” and “East to West” investment.

International Finance Capital Ltd
37th Floor, Bank of America Tower
12 Harcourt Road, Central
Hong Kong

IFC brings world-class technical, creative and business guidance to businesses and specializes in facilitating the capital transactions that are essential in today’s rapidly evolving business environment. We offer equity participation to successful, well-managed companies, and to those businesses in need of additional capital or restructuring to realize their full potential.

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