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China Opens Doors to Private Investment as U.S. Closes Them

Samuel Staley
June 23, 2009, 2:54pm

I was struck by a recent story in the China Daily reporting on the Chinese government's relaxation of rules limiting foreign investment in real estate and other sectors. Meanwhile, in the transportation arena, Congressmen James Obserstar and John Mica have included recommendations in their transportation reauthorization bill that would reduce private sector opportunities to invest in our underfunded transportation system.

More specificaly, the Chinese recognize that foreign direct investment (FDI) is crucial to meeting its economic growth goals.

     "One of the biggest changes is loosening regulation on foreign investment in the property sector.
     "Other suggestions include giving foreign investors access to the high-tech industry and relaxing checks on individual foreign investment.
     "FDI dropped 17.8 percent last month from a year earlier to $6.38 billion, the eighth straight monthly decline amid the global economic downturn. But the drop was less steep than in April, when inflows fell 22.5 percent on a yearly basis.
     "In the first five months, FDI fell 20.4 percent to $34.05 billion.
     "The ministry's proposal is important to maintain growth in investment, one of the three drivers of economic growth, in the second half of the year," said Li Jianfeng, macro-economic and trade analyst with Shanghai Securities.
      "As government-led investment cannot maintain momentum in the next six months, stimulating investment from the private sector, including FDI, is critical to ensure GDP growth, Li added.

While the U.S. is not limiting foreign investment in many of the industries that are restricted in China, I found it intriguing that the Chinese recognize the value of private capital in leveraging domestric resources to spur economic growth. Indeed, the restrictions on private investment were established to slow economic growth during the "overheated" economy of 2006 and 2007. Moreover, private investment has been crucial to building Chinese transportation infastructure, particularly roads and ports.

The same insight is applicable to the U.S. We are faced with a significant shortfall in funding for critical transportation infrastructure. Private capital has been crucial to stepping to adding new roads and managing them in a more sustainable way in Chicago, Texas, Indiana, California, Florida, and other places. Yet, the Obserstar/Mica proposal would dramatically limit private sector participation by eliminating state flexibility to use public-private partnerships and requiring federal approval of these projects through a newly created Office of Public Benefits.

No wonder China can accomplish more in less time. It's not just the laws. It's also the attitude.


Samuel Staley is Research Fellow


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