Tuesday, May 22, 2012

China’s Upcoming Economic Tsunami



In a recent conversation with a trusted colleague who has been practicing immigration law in Southeast Asia for many years, he used the word “tsunami” to describe what he foresaw in China’s economic future.  Such a perspective defies the conventional wisdom espoused by many in the EB-5 legal and business development community, in which there has been a consensus that China is currently saturated with the weight of too many – hundreds! – of EB-5 projects, most of them from Lamesville.

I agree with my colleague, and the perception that China’s EB-5 investor pipeline is slowing down is, IMHO, nonsense.  The so-called “second tier” cities in China have barely been touched; we’re talking tiny villages of less than five million people. (-:  Tsunami indeed!  In recent blogs I’ve told you about various internal events in Chinese politics which are spurring interest in emigration within China’s emerging affluent class.   Buried in my massive “to read” pile was a May, 2011 article by Richard Hornik, a contributing editor to the Harvard Business Review, which I long ago read and wanted to share with you.  It’s an outstanding article (you have the link above) but there are key points which tie in with what I’ve been saying in recent weeks:

  • Exactly one year ago, The Asia Society's Center on U.S.-China Relations along with the Kissinger Institute on China issued a report on the subject of whether the U.S. should worry about or welcome massive inflows of Foreign Direct Investment (FDI) from its major economic competitor, China. 
  • The report estimated that China's outward FDI will total $1-2 trillion by 2020, and notes that its investment in the US is already doubling annually — albeit from a very low base.
Those of us who’ve spent the past year nurturing EB-5 projects in China would be less than honest if we did not relay a sense of growing interest, even anxiety, from the reputable migration agents in that country who are faced with the double whammy of investor visa unavailability in their traditional Canadian and Australian markets along with a plethora of EB-5 projects which are more style than substance…and made all the scarier by messes Missouri's Mamtek fiasco.  The report, predictably (given its Kissinger-esque, pragmatic perspective), found that such impact should be welcomed:

"We conclude that China's impacts can be managed under existing U.S. FDI doctrine: welcome the economic benefits and competition from foreign direct investment ... screen out all deals with specific negative security implications; and handle more general concerns about Chinese behavior under domestic law rather than expecting the inward investment review process to carry that weight."

But Mr. Hornik notes that reading between the lines and in consideration of the intellectual property breaches and GOC(Government of China)-driven cheap financing available to Chinese investors, a rational person has plenty of reason to worry. Excerpted from the report:

“…there are concerns that China is so large and influential that its state interventions will distort world prices and markets."

As they say at Columbia’s International Tax LLM program, “no DUH”. (-;  What is intriguing to me is that what might trigger fear in the eyes of an educated economist observing this dynamic instead triggers joy – and, all too often, greed – within a U.S. EB-5 sector still reeling from a banking industry which has, for all intents and purposes, frozen U.S. development as a knee-jerk result to the financial crisis.  Mr. Hornik’s article draws a great comparison to the post WWII economic explosion experienced in Japan as witnessed by the U.S.  He observes:

“…this time sheer size and the political structure of China present a different set of concerns than those confronted a quarter of a century ago when a whiff of hysteria playing on fears of a Yellow Peril of Japanese economic imperialism swept the U.S.  In the late 1980s, Japanese investors were trying to buy everything from Pebble Beach to Rockefeller Center to Fairchild Semiconductor.  The gist of "The Selling of America," a 1987 TIME cover story I reported, was that, in fact, FDI is essential for economic growth and has played a long and valued role in the U.S. economy dating back to the beginnings of the country.”

Let me tell you, I REMEMBER that Time Magazine cover story he wrote, way back when I was a front-line visa officer in Ciudad Juarez, Mexico and Sting still had hair.  Mr. Hornik notes correctly that the past two decades of U.S. economic engagement with China has not advanced China’s political system and that it has, in fact, regressed.  Consider the GOC’s direct shut-down of China’s private real estate market in the past year and it is clear that “economic liberalization” is in the eyes of the beholder.  As a witness to all of this, it is bewildering to me:  how precisely does one reconcile the real estate freeze with the GOC’s recent open collaboration with the World Bank in examining the best paths for stable and open economic growth for the nation?  No clue on my end, and while Mr. Hornik does not profess to have the answers, I will end today’s entry with his closing words in the article, which sum things up as well as I ever could:

“No economy, least of all the profligate U.S., can afford to reject out of hand the prospect of attracting a significant share of the $1-2 trillion in FDI that China will disburse over the next decade. But neither can we continue under the naive assumption that somehow China's participation in the world economy will gradually make it more willing to play by the commonly accepted rules of global commerce and finance…”

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