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China recently released figures on foreign direct investment (FDI) for January and February that showed a continued increase in the rate of foreign-owned capital flowing into the country. There was a year-over-year decrease from Europe of about 13%, but a whopping 43% increase from the U.S., even though there was a decrease in February from January.
Foreign investors in China, especially from the U.S., are expressing little concern for the potential impact of a Chinese debt crisis that could envelope their assets there, or for the ongoing geopolitical maneuvering between the U.S., Russia and China. There are similarities between what is happening economically and financially between the U.S. and China today and what occurred between the U.S. and Japan a generation ago. But there are also differences.
Putting aside for a moment the similarities and differences in debt levels and asset prices between what occurred in Japan a generation ago and China today, the most profound difference is in the treatment of foreign private capital by the Chinese government. The Chinese have adopted a government regulatory reform effort not only designed to attract foreign investment, but to increasingly attract the kind of investment necessary for the Chinese economy to grow. That is investment in high-level research facilities and technology. And, so far, they are very successful. (I previously addressed this in 2012.)
In the process, China is attracting capital away from other parts of the world, especially the U.S. and Europe, where high levels of government regulation burden companies and investors. I will deal with this more broadly over the Open House weekend, but in the meantime the Chinese government is adopting a framework consistent with what is known as the "efficiency thesis." The efficiency thesis stipulates that the best route to economic growth is by way of decreasing the state burden on private capital, through both taxes and regulation.