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China tends to leave investors weak

Marketplace Staff May 9, 2007
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China tends to leave investors weak

Marketplace Staff May 9, 2007
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DAVID FRUM: Now you know that it’s not safe to buy pet food from China . . .

KAI RYSSDAL: Commentator David Frum.

FRUM: So why do you think it’s safe to put your 401k there?

Hundreds of billions of dollars of investment money have flowed into China over the past 15 years. Only the United States and Great Britain now receive more foreign direct investment than China.

But talk to a foreign investor in China, and you hear one terrible story after another. As one investor recently put it to me: “One of two things happens to your investment. It fails, and you lose your money. Or it succeeds, and they take your money.”

U.S. investment in China earns surprisingly little. The most recent U.N. figures show that U.S.-affiliated companies earn less in China than they do in Mexico.

The money continues to flow on the assumption that China’s progress can only accelerate. Yet even now, well into China’s third decade of economic reform, half the industrial workforce still works for state-owned enterprises. And telecoms, banking, food distribution and energy remain government monopolies.

Property rights have only begun to exist, and cannot be unenforced even when they do exist.

Even China’s keenest admirers acknowledge that virtually every large transaction requires a bribe.

Economists, like Carnegie’s Min Chin Pi, estimate that China’s corruption industry is equivalent to something between one-twentieth and one-fifteenth of gross domestic product.

And all those impressive Chinese economic growth figures ultimately rely on statistics generated by the same government that lied to the world about industrial additives in the pet food.

Something real and important, and possibly very positive, is happening in China. Of course, something real, important and positive happened in the dot com world in the 1990s. Just not a happy return on equity.

RYSSDAL: David Frum is a resident scholar at the American Enterprise Institute.

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