Pandemic, Rising Tensions, FIRRMA Leading to Continued Drop in Chinese FDI in US, Report Says

Chinese direct investment in the U.S. last year fell to its lowest levels in a decade and will likely continue to drop this year, according to a May 11 report from the National Committee on U.S.-China Relations and the Rhodium Group. Investment dropped to $5 billion in 2019 from a decade-high of $45 billion in 2016 due to more investment reviews by the U.S., restrictions on outbound investment by Beijing, the COVID-19 pandemic and rising tensions between the two countries, the report said. The decreased investment may be part of a broader trend caused by the pandemic as industry grows concerned about the consequences of over-dependence on foreign supply chains, the report said.

Tighter U.S. regulations, including the 2018 passage of the Foreign Investment Risk Review Modernization Act (see 2002200002), led to less investment in “specific sectors,’ the report said, including the transport, infrastructure, and information and communications technology sectors, which all fell by 100% since 2016. “Initial data” suggests Chinese foreign direct investment (FDI) continued to fall in the first few months of 2020 when China was hit hard by the COVID-19 pandemic, the report said. That trend may continue: China has imposed restrictive outbound investment policies, the report said, and the Committee on Foreign Investment in the U.S.’s expanded jurisdiction under FIRRMA has led to a “difficult” U.S. investment environment.

In addition to regulatory obstacles, worsening tensions between the countries has led to threats of trade retaliation and industry uncertainty, even after both sides signed a phase one trade deal (see 2005080010). “This has further soured the mood of businesspeople on both sides of the Pacific,” the report said. “The worsening bilateral relationship and a growing public backlash against China in the US make it likely that Chinese buyers will also face significant political opposition to any big acquisition attempts outside of the regulatory CFIUS process.”

While the phase one deal was meant to reduce tensions and lead to more cooperation, the COVID-19 pandemic “changed that trajectory in many ways, and the outlook is now more uncertain than ever before,” the report said. Government efforts to contain the spread are having “a serious impact on economic activity,” including Chinese investment in the U.S., which “ground almost to a complete halt” in the first quarter of 2020. The pandemic and scarcity of medical supplies has also led to global concerns of over-dependence on foreign supplies, leading to a “consequential debate about re-shoring and risk diversification,” the report said.

“China is at the center of this debate,” the report said, “and US companies could look to move manufacturing capacity out of China as part of a broader diversification push.” In another scenario, pressure to “globalize supply chains” could lead to more FDI “as multinationals are forced to localize operations and source from a greater number of suppliers,” the report said. And while tensions are rising, crises tend to create opportunities for investors, the report said. “Despite current tensions, the economic argument for expanding two-way investment in non-sensitive sectors between the world’s two largest economies remains valid,” the report said. “Whether these opportunities can be seized will depend in large part on political leadership on both sides.”