US-China Report: China Inc. Poses Major Competitive, Political Challenges

China’s state-controlled enterprises expand their power, raising concerns about investment in the US.

In the wake of the global recession, state-owned and state-controlled enterprises account for as much as half of the Chinese economy, according to a report released today, raising growing concerns about Chinese investments in the United States.

All 130 leaders of the largest state-owned companies in China are member of the Chinese Communist Party, notes the latest report from the U.S.-China Economic and Security Review Commission, created by Congress to report on national security implications of the U.S.-China trade and economic relationship.

Support for these government-owned enterprises extends throughout the Chinese political structure, warns William Reinsch, the commission’s vice chairman. The Chinese government “shower[s] them with subsidies and other favors, including trade and investment restrictions designed to hobble their foreign competitors,” he said. “China has also grown more explicit in its attempts to wrest technology from these foreign competitors.”

While Chinese direct investment in the U.S. is “low,” the commission states, China has $3.2 trillion in foreign exchange reserves “that could be converted into direct investment in the United States.”

Though foreign investment in the U.S. is generally viewed as positive because it creates jobs, Reinsch said the U.S. may want to more closely monitor foreign investors that are state-owned companies that may enjoy unfair competitive advantages such as access to lower-cost capital. “The U.S. government must also take into account national security concerns when the acquisition is of a company with sensitive technology, for example,” said Reinsch.

See Huawei's Global Ambitions Come under a Cloud

Among its recommendations to Congress, the commission said lawmakers should insist that any bilateral investment treaty with China ensure reciprocity and “explicitly address the unfair challenges posed by China’s SOEs in all markets.”

Mixed Results in Shift to Consumer Economy

In 2011, the U.S. deficit with China reached $295.4 billion, an 8% increase from 2010, and the trade deficit stood at $203.1 billion for the first eight months of 2012. This year will make the 29ththat the U.S. has run a trade deficit with China.

While the Chinese government has announced its intention to move from an economy driven by exports to one fueled more by domestic consumption, the commission said the slowing economy in China has put that strategy “on hold.” Instead, China has encouraged banks to lend and increased infrastructure spending.

China also has embarked on efforts to move its manufacturing, the commission stated, “from labor-intensive, low-wage and resource-dependent factory work to a higher position on the value-added, high-technology scale.” The report noted that effort requires the support of basic research, creation of an advanced scientific and technical education system, strong intellectual property protection and the fostering of entrepreneurship.

To date, the commission found, China’s record has been “mixed.” It noted the country has invested heavily in the infrastructure of innovation. For instance, it more than tripled the number of science and technology university programs in the past decade. And the number of postgraduate degrees awarded to Chinese scientists and engineers rose from 30,328 in 2001 to 173,336 in 2009.

Complementing China’s efforts to promote innovation, however, is “an elaborate strategy for obtaining America’s advanced technology by subterfuge, either stealing it outright or by requiring U.S. companies to turn over technology to Chinese business partners as a condition for investment and market access to China,” the report stated. And it noted that the U.S. trade deficit with China in advanced technology products climbed from $11.8 billion in 2002 to $109.4 billion last year.

China Builds its Military Prowess

China’s squabbles with Japan and the Phillipines over territorial claims have been stoked in part by China’s rising military power, the commission found.

“Just within the past year, China has commissioned its first aircraft carrier; test flown a second potentially stealthy, advanced fighter aircraft prototype; substantially improved its indigenous satellite navigation system; and expanded the scope of its military exercises and training activities,” observed Dennis Shea, chairman of the commission.

The report said China has also ramped up its military efforts in cyberspace. Shea said hackers in China “have waged aggressive cyber espionage campaigns targeting a wide range of U.S. and international military, government, commercial and other nongovernmental organizations.” Earlier this year, it noted, Chinese hackers stole the user credentials of 150 NASA employees and “gained full functional control over networks at the Jet Propulsion Laboratory.”

China’s impact on a complicated global supply chain for U.S. military products was another concern raised by the report. It cited a Senate Armed Service Committee report that found “numerous instances of suspect parts used in a variety of military systems and identified China as ‘the dominant source country for counterfeit electronic parts that are infiltrating the defense supply chain.’”

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