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Friday, August 03, 2012 12:42 AM

China Buys U.S. Businesses at Record Pace; What are the Implications? Will Alarm Bells Ring?

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CNN Money reports Chinese buying of U.S. business at record pace

Chinese direct investment in the United States could hit a record high in 2012, according to a new research report released Wednesday.

Total Chinese foreign direct investment in the U.S. is on pace to reach at least $8 billion this year, according to the report from research firm Rhodium Group.

That would top the previous record of $5.7 billion reached in 2010, said Thilo Hanemann, research director with Rhodium Group, which tracks all acquisitions and investments in manufacturing facilities, warehouses, labs and offices by foreign companies in the United States valued at $1 million or higher.

In manufacturing, the biggest investments are being made by Chinese firms with products that have been slapped with hefty anti-dumping tariffs, Hanemann said.

Opening up a plant in the United States allows Chinese firms such as Golden Dragon Precise Copper Tube Group, Inc. -- which broke ground this year on a $100 million plant in Thomasville, Ala. -- to avoid these tariffs.
What are the Implications?

China buying US businesses is a necessary part of correcting global imbalances.

As a direct function of trade math, China's reserves must eventually return to the US. The only way that will not happen is if the US defaults on foreign-held treasuries.

However, don't be deceived by the words "record pace".

To put the $8 billion of direct investment in perspective, China has close to $1.75 trillion in US dollar reserves and $3.2 trillion worth of total reserves.

Will Alarm Bells Ring?

Some might be alarmed by China buying US businesses.

Actually this is a good thing, and the faster things speed up, the better off the US and China will both be. Direct investment will provide much-needed jobs in the US and it will alleviate China's dependence on an unsustainable model of fixed investment.

Unfortunately, "record pace" is nowhere close enough to matter, but all trends start somewhere. The key point is that mathematically, dollars must return home, and the sooner it happens the better off the global economy will be.

Don't expect alarmists in Congress and union sympathizers to see it that way.

Mike "Mish" Shedlock
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