Foreign Investors Still Feasting on U.S. Securities

Overseas investors continue to gobble up Treasury notes and bonds -- a must for the United States to continue financing the trade deficit. The Treasury Department's most recent report shows that net foreign investment in long-maturing government securities nearly doubled from March to April, despite the depressed dollar and the continuing roller coaster ride in world financial markets.

Capital from emerging nations also continues to pour in to U.S. companies as government wealth funds and private investors remain confident in the efficiency and transparency of our financial system -- for now, anyway. The subprime mortgage debacle and the cracks it has exposed in securities regulation could negatively impact that mind-set, and some economists are starting to sound alarm bells. An erosion of confidence could send overseas investors elsewhere in search of higher returns on their money, which could strain the U.S. economy to a breaking point.

China, the top foreign purchaser of U.S. securities, is the biggest concern -- specifically the Chinese government, which has remained committed to investing in U.S. assets despite the dollar's decline. This dependence on funds from Beijing has sparked concerns in both the public and private sector.

The U.S. government recently initiated talks with China to develop a bilateral investment agreement. The two-day meeting that took place earlier this month doesn't mean that there will be an investment treaty -- and any eventual treaty will not cover the financial services sector, the most sensitive area of concern in the U.S. But Treasury officials assess the chance of negotiating an agreement with similar standards to U.S. bilateral investment treaties with other countries as "reasonably good," The Wall Street Journal reports. China already has such treaties with close to 40 other countries. But compared to the time frame it's taken for the U.S. to develop such treaties with other countries, progress has been slow, resulting in criticism for Treasury Secretary Henry Paulsen

Businesses with strong ties to the upcoming Olympics in China might look at the government's progress in treaty negotiations with that country more patiently as they grapple with the many levels of complexity in that nation. "If you're making the business decisions, how do you show your support for human rights, your respect for your host country, your good citizenship in your home country, your need for open markets, your concern for the safety of your employees and your accountability to your shareholders -- all at the same time?" asks Dr. Greg Young, associate professor of business ethics and strategy at North Carolina State University.

Clearly, we're only in the early stages of a total realignment of the global economic landscape, where China will continue to be a star player.