뼈가되고 살이 되는 글이니 번역해 읽어라.... FDI FLOWS TO CHINA- Problems ahead. Guest Column by Hari Sud Questions are raised whether the -heightened trade tension and US concern about Chinese military build-up would affect the FDI flows into China. China has been selling its relatively cheap but lower quality products with ease both to US and EU. With US, China is running a trade deficit of about $100 billion a year. A similar trade deficit exists with the EU. The Chinese do not feel obliged to balance the trade. They use FDI and dollar reserves in US and elsewhere as a tool to enhance their trade position. Though the US does not like it, only recently it has started to flex its muscles. Trade imbalance discussions have been going on for the last five years but the US took no action and the Chinese also did not take any initiative. Then in March of this year word came out that China has developed a 6,000KM range missile. It raised hackles in the Pentagon. Next, China stopped short on reining in North Korea. An open call to the Chinese was made to re-value its currency, upwards. To cap it all, a Chinese general threatened the US with nuclear weapons, should US intervene in any future Taiwan- China skirmishes. The latter broke the camel뭩 back. Suddenly, a host of press and Pentagon inspired briefings made it known that party for China in the US is over. These days China is addressed as Communist China. Prior to this, the word 멌ommunist?was always missing while describing China and its leaders. Even the most conservative newscaster on CNN (Lou Dobbs) has latched on to the subject. He has produced a few ten-minute clips on Chinese perfidy in his 6 O뭖lock news & analysis show. None of these favor Chinese interests in US and elsewhere. Why this sudden Change in US? The last four years have been a busy period for the President Bush뭩 Administration. Terrorism, 9/11 and self-imposed war in Iraq have taken the bulk of its time, leaving dealing with China as a lower priority item. The Chinese took full advantage of this US preoccupation. They managed to grab an average of $ 50 Billion FDI a year in last three years. With the latter the trade deficit soared. In the last one year or so the Bush Administration has started to pay attention to the subject. Not only the 6,000KM missile is bothering them, a closer examination of Chinese published and hidden defense budget has indicated that Chinese spend a lot more on defense than they admit. Published US reports indicate that China spends close to $90 Billion on defense. This is three times more than what the Chinese say they spend. Further focus was brought in by the untimely proposal by the Chinese to acquire UNOCOL, an US oil exploration and pipeline giant. Politicians in the US Congress opposed the above deal. If needed, they could block it completely.   With pressure from many sides the Bush Administration decided to act. The easiest way to act was to ask the Chinese to revalue their currency. They asked for a 15% upwards revaluation. Chinese replied after months of wait with a 2% revaluation. Not only did they de-peg their currency from the mighty dollar, they allowed it to float. The latter is a tricky undertaking. It places the Chinese currency at the mercy of international traders. The traders may force an upward or downward revaluation. It would seem that US and EU wish to revalue now upwards  the Chinese currency by about 15% .  But it could not be realized.  With a floating currency Chinese products will not have the same advantage they had before. That product will not be cheaper and the effects will be seen in the next two to three years. The latter timeframe is necessary as it will be a slow affair having a minimum impact on the Western consumers.   Will it affect the FDI Flow to China? Not immediately. But the long-range impact may not be to the advantage of the Chinese. In one move, the West has halved the margins the Chinese manufacturers enjoy. Margins were already very thin as Chinese price their products lower to drive other countries out of the market. These margins will be further impacted with Yuan revaluation. Alternatively the prices of the products could go up to compensate for the revaluation. This move will preserve the margins, but higher prices will reduce western consumer뭩 rush to buy all things Chinese at throwaway prices. Since the FDI investors including the round-tripping money from Hong Kong are looking for big pay offs in short term, they will tend to take their monies elsewhere. This combined with US Administration뭩 reluctance on China will further compound the problem. The FDI funds will not disappear from the Chinese economy all together. But reduction will be visible as the currency traders revalue Yuan upwards and upwards. In three years when the value of Yuan is significantly higher, the FDI will be lower and lower. China still offers a very business friendly environment; hence some funds will continue to go in its direction. But it will be less. Why did Clinton upgrade US and the Western Investment in China? This massive flow of funds in China has its origin in President Reagan뭩 desire to use China as a second front to beat the Soviets. He allowed investments in China to develop the country further so that it could stand up to the Soviets. This effort was successful. The Soviet Union fell apart in 1989. By then the FDI investment, which was averaging $4 to $5 Billion, a year in early eighties had risen to $10 Billion in 1990. With President Clinton in power in 1993, focus was shifted from Star War expenditures to economy. Businesses in US and elsewhere at that time were hard pressed to make a return on investment. The recession of 1991-93 had taken a huge toll on business investment and productivity. President Clinton and his advisors came upon a great idea to boost the economy. They wished to shift the labor-intensive smoke stack industry to China. The latter utilized the low cost Chinese labor to make goods which old and outdated factories in the US were having difficulty to manufacture.  The US companies who were relocating were asked to retain the marketing aspect of the products with themselves. In this way the Chinese got the money and the jobs and the US got lower cost products. This formula by 1995 was highly successful. FDI flows to US were in torrents. In 1995 the Chinese pegged their currency to dollar at a fixed price. They pretended that China has no inflation and China has to import technology and machinery to build factories. Hence the fixed price currency conversion is essential. President Clinton guaranteed uninterrupted flow of FDIs in return.  With all these steps and some more, profitability to the American businesses returned. By 1998, the stock market was on its upward swing. . This guaranteed Clinton뭩 re-election. After re-election he further enhanced FDI flow to China. The result was that when 1997-99 Asian economic crisis struck, the smaller Asian Tiger economies  sufferred but it had no impact on the Chinese economy as the Yuan was fixed firmly to the dollar. By Year 2000, the FDI had reached $35 to 40 billion range.  This continued during the first term of President George Bush.  In years 2003 and 2004, the Chinese clocked a $40 Billion FDI each year. This year in 2005, it is expected to reach about $55 Billion. This has created a $100 Billion a year merchandize trade deficit in favor of China in US-China trade. A similar situation exists with the EU. This situation may not be allowed to continue uninterrupted. That is why a push was started to re-value the Chinese currency as a first step. Also with lots of money, Chinese started to spend it on defense and on offensive weapons. The 6,000KM missile is a key example of the latter. Over confident Chinese military also gave notice to the US to watch out on Taiwan issue. The threat of US being nuked, given out by a Chinese General has not gone down well.   How Does India fit into this Equation. Recently concluded Bush ?Manmohan Singh agreement on commercial nuclear reactors to India is the tip of the iceberg of the US concerns about the growing Chinese뭩 military and commercial prowess. The US perhaps wishes to counterbalance the growing Chinese strategic power roughly in the same manner as they counterbalanced the Soviet influence in eighties. Had there been no 9/11 or Iraq War II, then this cozying up of US to India would have happened four years back. President Clinton made a small beginning in 2000. At that time the full weight of Chinese actions were not clear to his administration. In the last four years, the US-China trade deficit has scaled new heights. There is likely to be further enhancement of US ?India relationship. US attempts will be to wean India out of Russian military hardware. A much more enhanced relationship in the IT Services; BPO and KPO industry is in the offing. India is already one of the favored nations for future FDI investments. As FDI becomes less lucrative in China, India has positioned itself to take over the slack.  The Bush Administration will try to balance the trade.  . Already India has placed large order of commercial aircrafts with the Boeing Company. Two US companies are competing for a lucrative military aircraft contract. The nuclear deal will involve 6 to 8 large size nuclear power plants. Order for half of these will be placed in US. All in all a new beginning in India ?US relations has been made.   It is safe to conclude that current Chinese currency revaluation and its floating will value the Chinese currency upwards by about 15% in three years. The latter will have an impact on the FDI input into the Chinese economy. The slack of these will go to India. Moreover national geo-political rivalries, which are beginning to show its head in US-China relationship, are detrimental to investments in China. India stands to gain but it will take some time to see the impact.