With Credit Tight, White House and Congress Say "Thanks But No Thanks" to Chinese Investment

It's no secret that the American government has run up huge debts over the last few years, and that China (and other foreign countries) has been one of the largest buyers of this new (and troubling!) American debt.  Indeed, after a brief respite, China has once again ramped up its US debt purchases in the wake of the European debt crisis.  The result of these purchases has been lower interest rates for American consumers, and a check on US inflation that has allowed liberal economists like Paul Krugman to argue for even more government spending.  Nevertheless, China's debt purchases have also elicited loud screams from the very Congress that has created that debt in the first place.  Indeed, just last month the US Senate overwhelmingly approved an amendment that would "require regular White House reports on the financial and national security risks posed by debt held by China and other foreign governments."

Assuming that Chinese purchases of US government debt really are a big problem for the US economy and US national security (a rather dubious claim to be sure), one simple solution would be to encourage China to invest its greenbacks in private American companies (who could certainly use it right now), as Cato's Dan Ikenson explains in a recent paper:

If it is desirable that China recycle some of its estimated $2.4 trillion in accumulated foreign reserves, U.S. policy (and the policy of other governments) should be more welcoming of Chinese investment in the private sector. As of the close of 2008, Chinese direct investment in the United States stood at just $1.2 billion— a mere rounding error at about 0.05 percent of the $2.3 trillion in total foreign direct investment in the United States. That figure comes nowhere close to the amount of U.S. direct investment held by foreigners in other big economies. U.S. direct investment in 2008 held in the United Kingdom was $454 billion; it was $260 billion in Japan, $259 billion in the Netherlands, $221 billion in Canada, $211 billion in Germany, $64 billion in Australia, $16 billion in South Korea, and even $1.7 billion in Russia.

Sounds pretty reasonable, huh?  Well, only one problem: the White House and many folks in Congress don't seem too keen on Chinese private investment in the United States, either - at least, that's what two stories from over the weekend surely indicate.  First, the FT reports that the Treasury Department has thwarted an attempt by a Chinese firm to invest in a US fiber optic company because of national security concerns:

The Obama administration has forced a US maker of fibre optics to abandon a planned joint venture with China’s Tangshan Caofeidian Investment Corporation because it believes the tie-up would threaten national security.

The decision by the White House to scupper the move represents the second time in less than a year that the administration has sought to block a transaction involving a Chinese company because of security concerns.

It also offers a rare glimpse into the administration’s handling of sensitive acquisitions following a drought in cross-border deals during the financial crisis.

Emcore, which is based in New Mexico and makes components for fibre optics and solar panels, said in a statement it had withdrawn a voluntary filing with the Committee on Foreign Investment (Cfius) after the executive branch panel said it had “regulatory concerns” over the venture.

Cfius, which is chaired by the Treasury department, conducts classified investigations of deals on national security grounds.

Although it rarely blocks transactions formally – it has done so only once – the panel alerts companies about a problem to allow them to drop merger plans voluntarily.

Under the terms of the deal, Emcore was set to sell 60 per cent of its fibre optics business to TCIC for $27.8m in cash. “While addressing any regulatory requirements, Emcore remains committed to seeking other means of co-operation,” the company said.

The Treasury department declined to comment....

Late last year, Washington forced another Chinese company to abandon a bid to buy a 51 per cent stake in FirstGold, a Nevada mining group.

Second, Reuters piles on with news of a congressional attempt to thwart Chinese investment in an American steelmaker:

A bipartisan group of 50 U.S. lawmakers called on Friday for an investigation into whether a Chinese investment in the U.S. steel sector should be blocked on national security grounds.

The Congressional Steel Caucus, in a letter to Treasury Secretary Timothy Geithner, said it was "deeply concerned" the recently announced joint venture between Anshan Iron and Steel Group's ASISG.UL and the Steel Development Co also threatened American jobs.

The Chinese state-owned firm, also known as Angang, plans to invest in a $175 million rebar facility that Steel Development is building in Amory, Mississippi.

Rebar is a reinforcing steel bar commonly used in concrete and masonry structures.

The move comes at a time when U.S. steel companies have complained loudly about unfair competition from China and have won a number of U.S. anti-dumping and countervailing duties on Chinese steel goods.

It also follows a high-level pledge by Geithner and senior Chinese officials in late May that the United States and China would remain open to each other's investments.

"Anshan is China's fourth-largest steel producer and the product of massive Chinese government subsidies," the lawmakers said in their letter. "We are deeply concerned that their direct investment in an American steel company threatens American jobs and our national security."

"For example, Anshan could have access to new steel production technologies and information regarding American national security infrastructure projects," they said.

Chinese government subsidies could allow Anshan "to distort the American market and force American steelworkers to compete against a blank check," the lawmakers said.

So to recap: the US economy is teetering on the brink of a double-dip recession, and one of the biggest problems is access to investment capital.  The Chinese are trying to provide some of that absent capital by investing in American manufacturing (and American jobs, by the way).  Such investment also would quell many lawmakers' concerns (baseless as they may be) that China owns too much US government debt.  And yet, it appears that our White House and many in Congress are openly hostile to this Chinese investment.

In the best of economic times, telling China to take its dollars and buzz-off would be bad policy.  Right now, it's flat-out insane.