RISK MANAGEMENT

Two-Way Chinese-US Foreign Direct Investments Decline; Europe and Others in Asia May Emerge the Winners

While foreign direct investment into China by US organizations stayed steady at US$14 billion in 2017, FDI into the US by Chinese companies fell by more than a third to US$29 billion, according to a new report by consultancy Rhodium Group and the National Committee on US China Relations.

The report, “Two-Way Street: 2018 Update,” updates investment trends with full year 2017 data and describes the outlook for 2018.

“Policy and politics in China and the US – rather than commercial forces – are mostly to blame for the two-way investment decline,” the report concludes. Separately, other analysts say the decline opens the way for other countries to put money to work in the world’s two largest economies.

‘Fragile’ Outlook

Beijing has tightened controls over outbound investment and cracked down on leveraged private investors, while Chinese acquisitions in the US were pruned by increased investment screening by the Committee on Foreign Investment in the United States (CFIUS).

“We estimate that deals worth more than US$8 billion were abandoned in 2017 due to unresolvable CFIUS concerns,” says the report.

“The outlook for two-way investment is fragile as Washington and Beijing re-assess the foundations of the economic and political relationship,” the report continues.

While China is signaling a more relaxed policy on outbound investments as its concerns about capital outflow subsides, the government has also formalized new rules that permit intervention in transactions at any time. This is a step backward from the 2014 liberalization.

The currents in the US argue against Chinese investment, as legislators plan to overhaul the investment screening regime and the White House moves against Chinese FDI as part of its Section 301 case on Chinese intellectual property threats. The traditional advocates of moderation, including the business community, are also less willing to push back, the report notes.

Opportunities for Others

Despite the FDI slowdown, the world’s two largest economies are continuing to grow. The tax cuts in the US and promises of market opening moves in China make the two markets more attractive to foreign investors that are not hampered by their policy makers.

European and Asian corporates are likely to find a warmer welcome in both markets. And Chinese money that was originally allocated to America is likely to head to Europe instead, particularly investments in technology and the search for intellectual property transfers.

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