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Chinese investment into US unlikely to recover in 2019 after 84% fall in 2018

The U.S. is no longer a welcoming venue for Chinese companies to invest, according to Ning Gaoning, chairman of Chinese chemicals giant Sinochem. He told the World Economic Forum in Davos that President Donald Trump's hostile tones would put off investment. But the reality is that Chinese investment has already been dramatically reduced after Beijing tightened the reins on outflows of capital.

Chinese investment in the U.S. collapsed to $4.8 billion in 2018, down 84% from the previous year and 90% lower than in 2016, according to a report from consultancy Rhodium Group. The 2018 figure is the lowest level in seven years. When divestitures are included, Chinese foreign direct investment, or FDI, was negative as investors sold $13 billion of assets.

SNL Image

China's economy has become increasingly integrated with that of the U.S., but the flow of capital from China has been reduced to a trickle.

Source: Associated Press

Rhodium's analysts say this trend is unlikely to reverse in 2019. There are only $5 billion of transactions in the pipeline, compared with $10 billion at the end of 2017. The biggest deal on the horizon is the $2.7 billion takeover of insurance group Genworth Financial Inc. by Oceanwide Holdings Co. Ltd., set to be completed in the first half of 2019. Chinese firms are expected to divest a further $20 billion of U.S. assets.

"You will see there will be less investment going abroad. I think the Chinese are getting quite confused. They thought they are welcome to invest in other countries, but now they realize that they are not being welcomed all of the time," Ning told the Davos forum, according to the Financial Times (London).

While the poor trade relations between China and the U.S. have dominated headlines and could be playing a role in the decline in investments, Rhodium attributes the change more broadly to "deleveraging pressures" from the Chinese government, as Beijing seeks to control its "fragile" balance of payments. This policy is unlikely to reverse anytime soon, Rhodium said.

"Beijing is unlikely to abandon its interventionist stance on outbound investment as climbing interest rates in the US will further incentivize capital outflows and add pressure on China's balance of payments," wrote Rhodium's Thilo Hanemann, Cassie Gao and Adam Lysenko.

World less accommodative to Chinese money

The U.S. government has also become less welcoming, most notably in its treatment of Huawei Culture Co. Ltd. and ZTE Corp.. The Foreign Investment Risk Review Modernization Act of 2018 places increased scrutiny on Chinese FDI in areas such as critical technologies and infrastructure.

Venture capital is one area that China-sourced investment has been rising. In contrast to the slowdown in FDI, Chinese venture capital financing in the U.S. hit $3.1 billion in 2018, up from $2.1 billion in 2017, with investors less affected by regulatory hurdles. But here, too, Washington, D.C., is clamping down, introducing tougher screening of venture capital and high-tech acquisitions.

Chinese FDI in Europe also has been on a downward trend. The total fell for the first time in a decade in 2017, dropping to €30 billion that year, a 17% decline from a 2016 peak, according to the latest available data from German think tank MERICS.

Much of the European investment is directed to the U.K., Germany and France, which accounted for 75% of China's total EU investment in 2017. Transport, utilities and infrastructure were the primary sectors, and China's state-owned entities accounted for the majority of investment. But as in the U.S., concern in Europe has been growing about the role of the Chinese government and its enterprises in the region's economic development.

The European Union agreed to a framework for screening foreign investments in November 2018 in an effort to "protect essential interests" after European Commission President Jean-Claude Juncker raised concerns in 2017 about foreign, state-owned companies investing in European ports, energy infrastructure and defense technology.

FDI down globally

But China's retreating foreign investment is not unique. Global FDI fell 23% in 2017 to $1.43 trillion, according to United Nations Conference on Trade and Development, having peaked at $1.92 trillion in 2015. China was the third-largest externally investing country in 2017, spending $125 billion, behind the U.S. ($342 billion) and Japan ($160 billion).

Rhodium noted that an improvement in trade relations could help Chinese funding re-emerge in the U.S. "If a sustainable solution is reached, we could see an increase in deal making in sectors that are not traditionally considered sensitive from a national security perspective such as consumer goods or healthcare."