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The Politics of Investment

On Monday, German chancellor Angela Merkel said that her government is thinking of enacting measures that would prevent funds controlled by foreign governments from buying German businesses. The concept is simple: if countries are not open to German capital, Germany won’t be open to them either.

The measure seems prompted by Russia’s interest in increasing its 5-percent stake in the European Aeronautic Defense and Space Company, the principal shareholder of Airbus. As Merkel noted on Monday, state-controlled buyers don’t always have commercial considerations in mind when they make corporate acquisitions.

Of course, Moscow is not the only predator on the global scene. There is also the world’s largest holder of foreign currency reserves: China. Today, China is sitting on $1.2 trillion in “forex” (called “the greatest fortune ever assembled”) and is creating a vehicle, the State Investment Company, to invest these holdings. Analyst Andy Xie has forecast that China could end up with over $10 trillion in net foreign assets—about five times what Japan possesses.


At the same time, Beijing is restricting foreign purchases of Chinese businesses. On Tuesday, Chongqing Commercial Bank announced that the China Banking Regulatory Commission will not allow the Carlyle Group to take an 8-percent stake in the regional lender. This comes on top of Beijing’s requiring the Washington-based investment firm to pare down its proposed shareholding in Xugong Group Construction Machinery.

How to stem the tide of government-backed investors implementing decisions made by distant politburos? We should begin by following Merkel’s lead and requiring investment reciprocity with China. And that may be just the first step in rethinking the free flow of capital. When autocrats begin using economic leverage against Western democracies, investment across national boundaries becomes more than a purely economic matter.



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