Those of us old enough to remember the 1980s – and I unfortunately include myself in that category – will probably recall how terrified Americans became about Japan “buying up” the U.S. The fears were sparked by Japanese purchases of American real estate, most notably famed Rockefeller Center in New York City, and other assets, such as Sony’s acquisition of Hollywood’s Columbia Pictures. Of course, the Japanese were not “buying up” America – Japan’s purchases were a miniscule fraction of U.S. assets – but nevertheless, the idea of a rising Asian power going on a shopping spree in a supposedly weakened America did not go down well with many in the U.S. Just as the U.S. seemed to be in decline, an up-and-coming economic rival swooped in, so it seemed, to gobble up the tastiest morsels.
Here we are, more than 20 years later, and the economic conditions are just right for another Asian invasion, with investors from countries like Japan and China going on a renewed spending binge in a crisis-hit United States. And if this does happen, Americans should welcome it. Greater Asian investment in the U.S. could offer a big boost to the struggling American economy. Here’s how it would all work:
The starting point can be found in the giant current account surpluses run by several of America’s most important trading partners, most notably China and Japan, which cause them to amass tremendous hoards of U.S. dollars. An estimated $2 trillion of China’s $3.2 trillion of foreign currency reserves are in greenbacks, for example. All of these dollars have to go somewhere, and they tend to flood into U.S. dollar assets like Treasury bills. China and Japan combined own more than $2 trillion of U.S. government debt.
Yet sitting on all of these dollars is putting China and Japan in an uncomfortable position. As the dollar weakens in value, their dollar holdings do as well. (The Chinese yuan is at its strongest point against the dollar since Beijing lifted a peg in 2005, while the yen is near its record high against the greenback.) Meanwhile, Chinese and Japanese investors get a tiny return on their holdings of Treasuries (since interest rates are so low), even though the outlook for U.S. debt is uncertain following a Standard & Poor’s downgrade of America’s credit rating. Yet China and Japan are, to a degree, forced to hold dollar assets anyway. It is difficult to switch all of those dollars into other currencies without undermining their value even further. (Nor is it clear which currencies would make sense to buy instead. Euros? With a debt crisis raging in Europe?) So China and Japan are stuck watching their dollars evaporate in value, unable to do very much about it.
But there is another option. One way to potentially protect the value of these mountains of dollars is to use them to buy real assets, like property or shares in companies in the United States. At the very least, such acquisitions could make their dollar holdings less vulnerable to the volatile gyrations of financial markets. And there is possible upside. Purchasing real assets like homes could allow Chinese and Japanese investors to benefit from a recovery of the U.S. housing market and overall economy (whenever than happens). Chinese and Japanese firms could capitalize on acquisitions to expand their market presence or acquire new technology or brands. Chinese banking giant ICBC did just that when purchasing control of a retail banking operation in the U.S. earlier this year.
Will Asian investors take the plunge? There are already signs of a possible Asian influx. Chinese investors are fanning out around the globe buying real estate, including American homes. Tokyo is actively encouraging Japanese companies to go shopping overseas. In an unusual effort to control the rise of the yen, the government announced last week it would form a $100 billion fund to assist Japanese investor with purchases of foreign assets. (The Japanese have been increasing their investments in the U.S., even through the financial crisis. Total Japanese foreign direct investment in the U.S. reached $257 billion in 2010, an increase of more than 15% since 2007.)
There are limitations, though. Just because China has $2 trillion in dollar reserves doesn’t mean Chinese can invest $2 trillion in American assets. Those reserves are deposits and thus there is a need to maintain a certain level of liquidity that only holding assets like Treasuries can provide. Plus, Asian investors take on a different sort of risk by buying real assets in the U.S. instead of financial assets. Many of the acquisitions Japanese investors made in the 1980s, for example, turned out to be losers.
However, Americans should welcome an Asian invasion with open wallets. Asian purchases of U.S. homes could help support the beleaguered housing market. Instead of bulldozing foreclosed houses, why not sell them to wealthy Chinese? Inflows of capital from Asia would also help keep interest rates in the U.S. low, giving more time for the American economy to repair itself and the American government to fix its finances. And it could generate jobs. The Asia Society figures that rising Chinese direct investment in the U.S. has created more than 10,000 jobs. Let’s face it, America needs the cash, whoever might offer it up. Beggars can’t be choosers.