Thursday, January 20, 2011

Don't rush to accept Chinese investment in Toledo

I don't know if he was the first to say it, but my father-in-law was the first one I heard recite the sentiment that America will never be taken by force - but it can be bought.

This opinion is widely shared by many who know that Americans will resist, with their last breath, any foreign invader who comes ashore intending the conquest or destruction of our nation. But what if the goal is not to take us by force, but to slowly, over time, become our keepers?

With the current amount of our nation's debt owned by the Chinese, some are very concerned about the implications, especially with Chinese President Hu Jintao's state visit going on in Washington, D.C.

Now we learn that unnamed Chinese investors are interested in purchasing waterfront property in Toledo.

To a city that never got out of the last recession, this one has hit us especially hard, so news of investors is welcomed by many. But Congresswoman Marcy Kaptur (D-OH9) isn't so thrilled, "because she believes it would be a calculated move by the government, rather than individuals looking for opportunity."

There is validity to her concern. While I certainly don't mind a corporation or individual investing in our area or purchasing property, I do mind if a foreign government does. The only exception I would see to a foreign government - especially a communist one - owning land is if they are building an embassy on it. But that's not what is planned in this instance.

Before we leap without looking, we need to give serious thought to multiple aspects of any potential transaction.

The first thing we need to know about these potential investors is whether or not they are a state-owned enterprise (one of the roughly 150 companies that report directly to the Chinese central government) or one of the subsidiaries (one owned by a municipal or provincial government in which the central government is a major shareholder).

Should we have a healthy distrust of a potential investor that is actually controlled by a communist government structure? Or, in this era of a global economy, do we overlook the communistic aspect in favor of potential jobs and tax revenues?

As this 2008 Forbes article explains, it's not so clear anymore:

In one portrayal, they are infiltrators to be viewed with suspicion. An example: Aluminum Corporation of China's (nyse: ACH - news - people ) recent multibillion-dollar purchase of a stake in Rio Tinto (nyse: RTP - news - people ) has raised fears about China's agenda for the acquisition of Australia's resources.

The other version sees state-owned companies as muscle-bound goons: without the smarts of a private company but with plenty of brawn. In this characterization, they are relics of a failed economic experiment that still dominate the national economy--controlling natural resources, utilities and many other vital sectors. Their power and influence--particularly their links to the ruling Communist Party and government--give partners and competitors pause.

Both views, however, fail to recognize that as the Chinese economy evolves, it is no longer so easy or desirable to pigeonhole state-owned enterprises. The line between them and private sector companies has blurred considerably.

There is also the question of which properties we should allow them to purchase if we decide we do want their presence.

As above, are they interested in acquiring our natural resources? Our relatively inexpensive waterfront property is a rarity in the world, much less here in the United States and I've been amazed that it hasn't been bought up before now. It's also our greatest asset and something I worked to emphasize when I was in office. But do we want our most valuable asset owned by a company controlled by a communist foreign government?

Restricting the sale of such property isn't a new idea. The government of Mexico has a restriction in their Constitution that prohibits foreigners from owning waterfront land. As this website explains:

The law declares that the Mexican nation has original ownership to all land and water in Mexico, as well as minerals, salts, ore deposits, natural gas and oil; but that such ownership may be assigned to individuals.

The Mexican Constitution prohibits direct ownership of real estate by foreigners in what has come to be known as the "restricted zone." The restricted zone encompasses all land located within 100 kilometers (about 62 miles) of any Mexican border, and within 50 kilometers (about 31 miles) of any Mexican coastline. However, in order to permit foreign investment in these areas, the Mexican government created the "fideicomiso," (FEE-DAY-E-CO-ME-SO) which is, roughly translated, a real estate trust. Essentially, this type of trust is similar to trusts set up in the United States, but a Mexican bank must be designated as the trustee and, as such, has title to the property and is the owner of record. The Mexican Government created the "fideicomiso" to reconcile the problems involved in developing the restricted zone and to attract foreign capital. This enabled foreigners, as beneficiaries of the trusts, to enjoy unrestricted use of land located in the restricted zone without violating the law.

A "fideicomiso" is a trust agreement created for the benefit of a foreign buyer, executed between a Mexican bank and the seller of property in the restricted zone. Foreign buyers cannot own real estate in the restricted zone due to Constitutional restrictions. The bank acts on behalf of the foreign buyer, taking title to real property. The bank, as trustee, buys the property for the foreigner, then has a fiduciary obligation to follow instructions given by the foreigner who is the trust beneficiary. The trust beneficiary retains and enjoys all the rights of ownership while the bank holds title to the property. The foreigner is entitled to use, enjoy, and even sell the property that is held in trust at its market value to any eligible buyer.

In order to allow foreigners to enter into the agreement contained in the Calvo Clause, Mexico requires all foreigners to apply for and obtain a permit from the Ministry of Foreign Affairs prior to contracting to acquire real estate in Mexico.

While we have no such prohibitions in our Constitution, the City of Toledo is the owner of the properties in question and, as owner, can place restrictions on the sale of the property. The city could even retain ownership of the land and offer, for example, a 99-year lease, preserving the ability of both parties (seller and buyer) to protect their interests in the transaction.

The potential sale of city-owned property to a foreign entity might be an issue that will unite previously opposing groups. I can see developers, free-market supporters, environmentalists and public access groups joining together to ensure the land is not owned outright by a foreign government whose long-term interests might conflict with our own. The communist Chinese government is well-known for taking a very long-term approach to accomplishing their goal of dominance.

There will be those who embrace the idea without any details, simply because it may bring needed jobs and tax revenues to the area. There will be others who reject it outright because it's communist China.

I believe the proper approach is somewhere in between: welcoming the interest of foreign investors while protecting American land from ownership by a foreign government. If it's done correctly, we can all be happy with the outcome.

3 comments:

Kadim said...

Frankly I'm a bit disturbed by the skepticism of this blog. I'm deeply fearful that, if it becomes widespread, foreign investors (who often come in the form of government/sovereign wealth funds) won't see Ohio as a welcoming place to invest.

I'm particularly concerned because I've come to the conclusion that foreign money from China and the Middle East is Ohio's only good chance of getting major infrastructure investment (sad but true, only they have the type of cash to spend on major but not necessarily super lucrative investments.)

What I can say is that China is quite keen to cultivate a professional business-oriented brand. Their hands off style, in particular regards to their investment in Africa, is well known. (They don't interfere with local politics.)

Ironically, you could argue that, if it's power you are concerned about, then letting them become entangled with investments in the US lessens their power. They are most powerful, right now, simply sitting on US dollars not doing anything with them.

As for Mexico, that constitution is a terrible irredeemable mess, that requires hacks like fideicosimos in order to function in the modern world economy.

Maggie Thurber said...

Kadim - it's not skepticism as much as thinking through implications that concerns me.

Though, I guess you could say I'm highly skeptical that our local elected officials who will be responsible for making the decision will think things through.

I think it's important, also, to define 'investment.' Governments routinely purchase bonds of all kinds from each other. While I think that kind of investment deserves careful planning as well, we're not talking about buying bonds here. We're talking about the Chinese government purchasing land - prime waterfront land, at that.

Perhaps it would help if you could give me examples of when other governments have purchased land here that wasn't for an embassy or similar type of need. We don't allow foreign governments to have military bases inside our country, though I realize that other nations afford us that privilege (primarily for their own selfish reasons which is okay with me). Can you give me any examples of municipalities selling public-owned land to a foreign government?

And you're pretty skeptical yourself if you think that foreign money is the only good chance of us getting major infrastructure investment. I, however, have hope that our new governor and members of our Ohio House and Senate will make the necessary changes to make our state attractive to all kinds of investments.

:)

DDBOOTS said...

Having contacted several City Councilmen and hearing several on the news broadcasts, they are evidently not thinking it through which is also scary when it comes to a decision such as this one.

It has been reported that the Chinese decline to exactly identify themselves which needs to throw out a big question and those on Council need to investigate it.

The only thing they want to do is sell the property and are not taking into consideration all of Toledo and Lucas County residents well being and safety and are not being considered by Bell or City Councilmen.

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