{"id":11340,"date":"2018-08-19T15:30:01","date_gmt":"2018-08-19T22:30:01","guid":{"rendered":"http:\/\/victorhanson.com\/wordpress\/?p=11340"},"modified":"2018-08-19T15:30:01","modified_gmt":"2018-08-19T22:30:01","slug":"chinese-foreign-investment-a-perspective","status":"publish","type":"post","link":"https:\/\/victorhanson.com\/wordpress\/chinese-foreign-investment-a-perspective\/","title":{"rendered":"Chinese Foreign Investment: A Perspective"},"content":{"rendered":"

Please read the following editorial by my college\u00a0James D. Jameson.<\/em><\/p>\n

It is hard to understate the impact that foreign investment has played in transforming China into the world\u2019s second largest economy.\u00a0 While direct investment might have peaked, China is still moving toward opening its stock markets to draw in foreign capital.\u00a0 Policymakers in Beijing hope that international investors might keep China economy from slowing and thereby avoiding the middle-income trap.<\/p>\n

However, as China\u2019s seeks to attract more foreign capital, one might wonder why wealthy individuals from China are \u2018stashing\u2019 their money abroad.\u00a0 Chinese buyers have been snapping up real estate from Cyprus to Vancouver for the last decade, and Chinese firms go on exuberant buying sprees every time Beijing loosens controls of capital outflows. Why do rich, and even upper middle class, Chinese have different expectations about future outcomes of investing in China?<\/p>\n

Most seasoned investors are aware of the risks of investing in China.\u00a0 These risks include the possibility of corruption, fraud and outright expropriations.\u00a0 However, most investors understanding these complications would find few recourses in a legal system with little claim to transparency or impartiality.\u00a0 One such recourse is the fragile system of \u2018guanxi,\u2019 a mutual assurance of interests driven by political, social and familial relationships.<\/p>\n

But what protections do investors have when \u201cguanxi\u201d goes south? I was one of the first investors in China\u2019s e-commerce boom in 1998. \u00a0My Chinese partner had founded a grey market publisher working with state publishing houses to co publish business books – a niche that the state-owned houses overlooked. My ambitious and very entrepreneurial Chinese partner tracked the emergence Amazon.com. \u201cWe can do the same thing in China,\u201d he and his new wife said.<\/p>\n

The e-commerce company was a momentary hit.\u00a0 It went public in 2010 on the NYSE with a market valuation of $1.2 billion.\u00a0 For the shareholders, it was a great but temporary success.\u00a0 The company\u2019s stock price declined precipitously after the lock up period.\u00a0 As a foreign investor who sold at the original IPO date, the transfer of our proceeds from the sale were temporarily blocked by the controlling Chinese shareholder who wished to extort a payment to cure past employee bonus awards, a company obligation and not a shareholder obligation.\u00a0 A threatened lawsuit in USA courts against the Chinese controlling shareholder of this NYSE company unblocked the funds.\u00a0 The US rule of law worked!<\/p>\n

However, the group of early investors of which I was one came under a dispute with the company\u2019s founders over the dissolution of predecessor publishing company. The board resolved to unwind the company which had a significant amount of cash on its balance sheet. As 30% minority shareholders, I watched our Chinese partners withdraw the cash for personal purposes and investments. These actions were a clear violation against the statutes of the company.<\/p>\n

We filed a suit in the Chinese courts in Beijing for embezzlement. \u00a0\u00a0In the United States or Europe, it would have been an open and shut case. Though the amount in dispute was small, we had a desire to test \u2018rule of law\u2019 in China. As we have found out over the past three years, the lack of appropriate rule of law has stymied us.\u00a0 The Chinese legal system prevents discovery, subpoena, and enforcement of a legally filed shareholders\u2019 agreement. Foreigner plaintiffs come last in line in the court docket and often find their causes stonewalled by these arcane prohibitions. There were times when the defendants never actually showed up before the judge in the court, an affront that would not have been taken lightly by a judge in the West.<\/p>\n

So as China tries to draw in foreign capital, its legal system still offers few protections for investors. Those risks are likely well understood by the \u201csmart\u201d capital flowing out of China. Therefore, it would only be prudent for foreign investors to ask:\u00a0 if insiders are selling and moving money out, should we be moving money in and buying?<\/p>\n

James D. Jameson<\/p>\n

Assistant Secretary of Commerce \u2013 Trade Development :\u00a0 George HW Bush Administration<\/p>\n

Ex Officio Member: Committee on Foreign Investment in the United States:\u00a0 1992\/3<\/p>\n","protected":false},"excerpt":{"rendered":"

Please read the following editorial by my college\u00a0James D. Jameson. It is hard to understate the impact that foreign investment has played in transforming China into the world\u2019s second largest economy.\u00a0 While direct investment might have peaked, China is still moving toward opening its stock markets to draw in foreign capital.\u00a0 Policymakers in Beijing hope […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_newsletter_tier_id":0,"footnotes":"","jetpack_publicize_message":"","jetpack_is_tweetstorm":false,"jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false}}},"categories":[275,282,1],"tags":[],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p466Sb-2WU","jetpack_likes_enabled":true,"jetpack-related-posts":[{"id":10383,"url":"https:\/\/victorhanson.com\/wordpress\/west-can-neither-live-with-nor-take-out-north-korean-nukes\/","url_meta":{"origin":11340,"position":0},"title":"West Can Neither Live with nor Take Out North Korean Nukes","author":"victorhanson","date":"July 13, 2017","format":false,"excerpt":"by Victor Davis Hanson\/\/ National Review \u00a0 It\u2019s time for the U.S. and its allies to prepare for a tough, messy confrontation. \u00a0 North Korea recently test-launched a long-range missile capable of reaching Alaska. \u00a0 When North Korea eventually builds a missile capable of reaching the U.S. mainland, it will\u2026","rel":"","context":"In "Putin"","block_context":{"text":"Putin","link":"https:\/\/victorhanson.com\/wordpress\/ahref=\/index.php\/categories\/angry-reader\/categorylink\/a\/putin\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":12409,"url":"https:\/\/victorhanson.com\/wordpress\/strategika-issue-65\/","url_meta":{"origin":11340,"position":1},"title":"Strategika Issue #65","author":"victorhanson","date":"June 6, 2020","format":false,"excerpt":"Taiwan:\u00a0\"The\u00a0Struggle\u00a0Continues\" Please read a new essay by my colleague, Gordon G. 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