As the 24 United States airmen patiently await their release from Chinese custody, there is another hostage that is going to vault up the world’s priority list if U.S.-China relations continue to deteriorate: the $350 billion of foreign investment in China.

Just as Russia’s default on foreign debt in 1998 allowed favored sectors of the economy and domestic politicians to benefit, at the expense of foreign investors, so this time a “nationalization” of foreign owned assets might well benefit the Chinese economy, would certainly benefit Chinese politicians’ Swiss bank accounts, and in this case would be perfectly legitimate under international law (provided “compensation” in the form of some 1 percent 40 year yuan bonds is paid.) At some point, the temptation is likely to be too great to resist.

Probably the one marginal protection that foreign direct investors in China have is that only a moderate percentage of the $350 billion originates from the “foreign devil” the Chinese government and some of its people hate the most, the United States.

For a start, according to the U.S.-China Business Council, around half of the $350 billion isn’t really foreign investment at all, in that it arises in Hong Kong. Whatever Hong Kong’s status before 1997, it has since July 1, 1997, been part of China, and should be treated as such. Thus investment in Hong Kong, given by Hong Kong’s Census and Statistics Department, should be added to the China foreign direct investment statistics, and Hong Kong investment into China should be subtracted from them.

The total stock of investment into Hong Kong and China on December 31, 2000, was thus roughly $350 billion, minus $176 billion of Hong Kong sourced China investment, plus $424 billion of investment into Hong Kong, minus $110 billion of China-sourced investment into Hong Kong, or $488 billion, of which approximately $200 billion was sourced through the British Virgin Islands, Bermuda or the Cayman Islands, hence probably mostly representing “round-tripped” expatriate Chinese money. Thus the net total of genuinely foreign (including Taiwanese) investment in China (including Hong Kong) was around $288 billion.

Of that $288 billion, $64 billion was sourced from the United States, $38 billion from Singapore, $36 billion from Japan, $35 billion from the United Kingdom, $31 billion from Taiwan, $25 billion from the Netherlands, $15 billion each from Germany and South Korea and $29 billion from other sources (these figures are of course VERY approximate.)

Some of this investment, of course, it would be foolish for China to expropriate. Toshiba’s television manufacturing plants in China, for example, sell into the Toshiba marketing network worldwide, provide employment for Chinese, and are of relatively low capital investment value.

In general, most of the overseas Chinese investment in China, and much of the Korean, Singaporean, Japanese and Taiwanese investment is of this type, making its expropriation financially unattractive. Of course, if China invades Taiwan and takes full control of Hong Kong, abolishing its “Special Autonomous Region” status, that will allow the Chinese authorities control over a very much larger collection of assets, but since such a step would result in a near-war condition with the United states, it is probably something the Chinese authorities wish to avoid if possible.

However, most of the United States investment, and much of the European investment, some $150 billion in total in nominal value, is of a very different type, since it is intended to serve the domestic Chinese market. For the last 20 years there has been a mantra in Western corporate boardrooms, along the lines of “Just think, if 1.3 billion Chinese would use our product.” Thus company after company has invested substantial amounts of money, without receiving significant economic return, in the hope of feeding or clothing 1.3 billion Chinese.

In Sunday’s New York Times, Coca Cola, Kodak and Kentucky Fried Chicken were given as examples of companies which had done well in China. All three of these companies are eminently expropriatable (do we really think that modern Chinese laboratories, capable of running a space program and a nuclear fission capability, are unable to backward-engineer the Coca-Cola formula?). For Coke, for example, whose Chinese market share was allegedly 15 times that of any other foreign soft drink company, Chinese sales represented only 2.5 percent of world sales in 2000, and China was part of Coca-Cola’s least profitable region, based on operating margins.

Optimists about China still remain. In this week’s Economist survey of Asian business, China’s government is praised as being particularly keen to adapt Western standards of corporate governance, with Chinese president Jiang Zemin apparently grilling Citigroup CEO Sandy Weill on the subject at a recent meeting. For the optimists, China has the highest economic growth in the world and, lacking the institutions of family control that make business difficult elsewhere in the region, is a far safer haven for minority investors. Why, after all, was China one of only two countries with a rising stock market in 2000?

That’s an easy one: because government controlled brokers, seeing the easy money that was being raised in the U.S. and elsewhere from a rising market, manipulated the very narrow Chinese domestic market to suck in retail investors, and thus provide much needed Initial Public Offering proceeds for such dinosaurs as Baoshan Iron and Steel, sold to the Chinese public in December on a 27 times price/earnings ratio, as UPI reported December 13.

Even the Economist, so optimistic about China, questions why China should wish to protect its 60 million domestic stock market investors when it oppresses its citizens in every other aspect of life. The short answer is, it doesn’t, and Jiang Zemin’s fascination with investor protection and corporate governance, so attractive to the more gullible liberals in the Western media, is purely for foreign consumption. (Corporate governance, after all, doesn’t stop you doing any of the really profitable bad stuff, as evidenced by the U.S. stock options scams of the late 90s where more than 100 percent of many companies’ net income was handed out to management as option profits without appearing on the income statements of the companies concerned.)

For the pessimists, which group includes this Bear, China’s growth statistics, as revealed by UPI on March 22, are nothing more than fiction. 17 percent of China’s Gross Domestic product have been buried “off the books” in a bank restructuring scheme that is nothing more than a method of “losing” bad loans and, according to analysts, there is another 25-50 percent of Gross Domestic product to go.

Hence China is not the growth engine of the next decade, it is far more like Mexico in 1981, with economic growth limited to an exploding and corrupt public sector, in China’s case largely military, and with the system kept in balance only by ever increasing injections of foreign exchange, in Mexico’s case from borrowing, in China’s case from foreign direct investment.

The Mexico collapse in 1981-82 is thus instructive. Mexico kept going as long as the flow of foreign loans remained enthusiastic. However, at the end of 1981, with tight money in the U.S., the flow of funds to Mexico suddenly dropped sharply. While the major banks were prepared to roll over commitments, to maintain Mexico in good standing, they were no longer prepared to put new money into the country. At this point, therefore, there was no benefit to Mexico in continuing to pleasure the international banks, so they stopped, engaged in some fun political moves like nationalizing the banking system, and suspended payments on international debt.

Russia in 1998 followed a similar course; after all, one of the joys for a government in defaulting on your international obligations is that it enables you to do all the neat stuff you have held off because your creditors wouldn’t like it — in Russia’s case, bankrupting the domestic banking system and firing all the reformists from the government.

China has even more options, because international law clearly allows them to nationalize foreign owned companies, providing “proper compensation” is paid, and endless precedents sanctioned by wishy-washy social democrat Westerners have proved that “proper compensation” can mean any figleaf you want, including government bonds with a low interest rate and a long maturity denominated in a hyperinflationary currency. Thus a nationalization of foreign direct investment by China would not even cut it off from bank credit, since it would not constitute a default.

In practice, the fun stuff that China would doubtlessly carry out to accompany the nationalization, might put off even Citigroup. After all, Citigroup has substantial assets in Taiwan, as well as China.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International.