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Thursday, August 17, 2006

Protecting Open Markets

This is a defense of China's restrictions on the flow of foreign capital into the real estate market followed by a criticism of recent US restrictions on inbound investment arising from to security concerns:

Nation's opening up is continuing despite rules, by Yi Xianrong, Commentary, China Daily: Recently, this author has been asked frequently by overseas media and businesspeople whether the policy of reform and opening up is being reversed and the country's doors being slammed shut to the rest of the world, now that restrictions are being imposed on speculative overseas capital in the real estate sector...

As a matter of fact, China's reform and opening up are developing in depth, and the country is bound to become more open to the outside world. Now let's have a look at the questions of concern. To begin with, China is not alone in restricting overseas speculative money from entering the domestic land-property market. Many other countries do so, too. ...

As one of the basics, housing assures the average citizen's right of residence in a modern civilized society. So in China, the construction, transaction and distribution of housing are foremost in meeting the whole citizenry's basic need for shelter so as to improve the masses' well-being. As a result, investment made in this field is not primarily for the aggrandizement of investors' wealth. It is the Chinese Government's duty to see that scarce land resources are fairly shared by each member of society in the context of the land's public ownership.

The government would be held responsible for dereliction of duty if scarce land resources became the object of speculative investment by overseas players in the face of the stark reality that the housing conditions for average Chinese remain poor. So the Chinese Government is well justified in putting limits on speculation in housing.

Some argue that limiting overseas speculative investment in the land-property market is a kind of discrimination and a short-sighted act on the part of the government.

If there is such a transaction-barrier free market in this world, all dealers enjoy undiscriminating treatment and can ... freely make all kinds of deals in the way they choose. But is there such a market in the world today? If there is, why are there so many trade rules between the world's countries? Why is there the World Trade Organization (WTO)...? ... [I]t is only natural that overseas speculative investment in the domestic real estate market is subject to restrictions. If this is considered discrimination, then could we ever find a place that is free of such discrimination? ...

The restrictions are imposed on overseas speculative capital in the domestic housing market because these investors are eager to reap fat profits. But where does the profit come from? Of course it comes from the domestic residents, who bear the burden of high housing prices. Moreover, once excessive speculation triggers economic problems, this kind of speculative capital from outside would withdraw from the scene as quickly as possible. Domestic residents, however, have to swallow the bitter fruits brought by the economic problems.

In 1997, for example, speculation on real estate helped precipitate the Southeast Asian financial crisis. China could suffer its own crisis if speculative activities in the land-property market go unchecked. In view of this, the government is wise to put restrictions on outside speculative capital. ...

Overall, the government has formulated some new policies covering foreign capital's access to the domestic market... [I]t involves the question of how to protect the national interest and the interests of the vast majority of the people in the course of reform and opening up, instead of reversing the process of reform and opening up.

This is timely. It's by Douglas Holtz-Eakin, former director of the Congressional Budget Office and chief economist of the White House Council of Economic Advisers:

Open Markets Start at Home, by Douglas Holtz-Eakin, washingtonpost.com: On August 1, Treasury Secretary Henry Paulson used his debut speech to make a strong case for open global trade and investment: "Nations that reform ... and open themselves to trade and competition, benefit their own citizens greatly. They see more jobs and higher living standards..." At the same time, he raised the alarm against growing protectionism: "But in many countries -- even those that have seen the greatest gains from open markets -- there is a disturbing wave ... of viewing market access as something that should apply to someone else's home market and not their own."

Paulson can do more than sound the alarm. Along with President Bush he can take a strong stand against investment protectionism in the United States. How? By thinking clearly and acting strongly on national security and inbound investment.

Earlier this year, international investors looked askance when an acquisition -- the purchase by Dubai Ports World (DPW) of Peninsular and Oriental Steam Navigation Company (P&O) -- dissolved into political controversy over putative security exposures from operations at a number of U.S. ports. This impasse came on the heels of heavy-handed Congressional interference in Chinese National Offshore Oil Corporation's (CNOOC) proposed purchase of American oil company Unocal.

One could hope that these episodes would be seen as a brief departure from the U.S. tradition of open international investment...

In general, openness to global markets, strong economic growth, and national security go hand in hand. ... Nevertheless, transactions do arise (and have arisen) in which national security considerations overwhelm their narrow economic desirability. Such transactions fall into the bailiwick of the Committee on Foreign Investment in the United States (CFIUS)... CFIUS has done its security job, but failed miserably in other respects. Communication with Congress has been poor and transparency has left much to be desired...

The president can take advantage of Hank Paulson's 30 years of experience in cross-border mergers and acquisitions and issue an improved executive order revising the marching orders for CFIUS to include greater transparency, improved cooperation with Congress, and improved monitoring of compliance. ...

Any lingering threat of politically-driven reviews will boomerang and directly hurt U.S. global investments. The greatest danger lies in other countries using recent U.S. missteps as a pretext for protectionist rules draped in the guise of national security. Press reports indicate that China will tighten screening of deals, and impose new curbs on foreign acquisitions. The Financial Times quotes a European banker as saying: "We should not be too critical of Beijing. After CNOOC was blocked by Washington from buying Unocal last year, no American should dare lecture Beijing about free markets." ...

It will be hard to resist using protectionism in the upcoming elections given the unequal benefits from globalization to date, but I hope Democrats can avoid that temptation. Closing markets is not the solution to growing inequality.

    Posted by on Thursday, August 17, 2006 at 12:33 AM in China, Economics, Housing, International Finance, International Trade, Politics | Permalink  TrackBack (0)  Comments (36)


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