US investment in China remains low amid pandemic, Fallout: Rhodium Group invasion

The fallout from Russia’s invasion of Ukraine this year is likely to contribute to the downward pressure on Chinese investment in the United States.

So says Reva Goujon, senior manager at the New York-headquartered Rhodium Group, which specializes in China research.

Slowing economic growth in China in recent years is already depressing inflows. “The current economic headwinds are strong and growing,” Goujon said in a telephone interview today.

Long-standing US national security concerns over Chinese investments have increased, but have also taken a new turn. “On the US side, some of the recent industry comments on Chinese investment are very interesting, such as the discussion about the potential CATL investment in North America,” Goujon noted. Contemporary Amperex Technology is one of the world’s largest manufacturers of batteries for electric vehicles; Chairman Robin Zeng was the third richest member of Greater China on the Forbes Billionaires List revealed this week. (See related post here.)

“There is almost a reflection of Chinese behavior in the US in (discussions about) strategic supply chain vulnerability and the idea that you would provide market access in exchange for transferring technology and using US labor. That’s a pretty fraught negotiating point between the US and China. This is going to be a fascinating area to watch.”

Mainland China-based companies with US investments include BYD, Fosun International, Fuyao Glass, Haier Group, Pharmaron, Tencent and Xtep.

Interview fragments to follow.

Flannery: What were your expectations of Chinese investment in the US at the beginning of the year before Russia invaded Ukraine?

Goujon: The inflow of Chinese foreign direct investment (FDI) to the US has remained low. The 2018-2021 average inflow was $7 billion, compared to the peak of $49 billion in 2016 and then $37 billion in 2017. For 2021, our preliminary estimate is $5.7 billion. It’s not surprising, given the number of economic factors we see on the Chinese side and the national security factors affecting things on the American side.

Most FDI, as you might expect, went into non-sensitive sectors such as entertainment and real estate. One transaction was approximately 60% of the total: the purchase by the Tencent-led consortium of a 10% stake in Universal Music Group. Another key feature of last year was that state investors were virtually out of the picture. According to our figures, private companies accounted for about 97% of all FDI in 2021. Again, not surprising, but a pretty profound trend.

At the moment, the VC trend is still relatively strong. That focus is mostly on health, pharma and biotech — about $3 billion to $4 billion. We didn’t see an increase in green field investment in the US or a major pipeline there last year, unlike the trend we see in Chinese foreign direct investment in Europe, which actually got a big boost in 2021. That’s something to look forward to.

Looking ahead, we do not expect a major increase in Chinese foreign direct investment in the US before 2022. Several factors drive this. Tight capital controls in China and a strict zero-Covid policy are (limiting) Chinese outbound investments. With Covid, investors can’t travel as much as they used to (nor) to increase their investments and make deals. The current economic headwind is strong and growing. The slowdown in the real estate sector and muted household consumption will already exacerbate those problems, alongside Covid.

There are questions about how much bang Beijing will actually get in its stimulus. They promise GDP growth of 5.5%. We think that’s totally unrealistic, but there are a lot of expectations about the stimulus. And what is the return on that investment? Given the recent sell-off (of foreign equity positions), we are concerned about capital outflows. Investors associate Russia’s (relation with) China as a sort of Eurasian alignment. You can see risk sentiment affecting investment as China tries to maintain a balancing act between politically leaning toward Russia and reducing risk from secondary actions.

That’s part of the number of reasons we expect the trend of low Chinese FDI to the US to continue. We should also pay attention to adjustments to the zero-covid strategy in China. We’re still months away before we see some really crucial things come into play, such as the adoption of a homegrown mRNA vaccine in China. If we see the Covid crisis getting more acute, let’s see if there is any easing in the distribution of the Pfizer vaccine.

From the American side, some recent comments on Chinese investments are very interesting, such as the discussion about the possible CATL investment in North America. There is almost a reflection of Chinese behavior in the US in (discussions about) strategic supply chain vulnerability and the idea that you would offer market access in exchange for transferring technology and using American labor. That’s a pretty fraught negotiating point between the US and China.

This is going to be a fascinating area to watch. US investors are looking at China’s industrial policy and thinking about what are safer areas to invest in and how to follow a trendline of where the (Chinese) state is putting a lot of its energy and resources into and where they won’t cross the US red lines on restrictions. Now the Chinese are looking at it from the other side. What has the US identified as supply vulnerabilities and where can Chinese investors try to follow that trendline without crossing red lines?

Another factor here is Alan Estevez’s confirmation as Secretary of State for Trade for Industry and Security. There is a lot of pressure on him and his agency to list fundamental technologies – not only related to inward investment, but also for emerging policies on outward investment. That’s another thing to watch out for as the US adds more definitions to trade and investment restrictions.

See related posts:

China Covid 19 Outbreaks Disrupt Supply Chains, Manufacturing, Investment, Human Resources — AmCham

China Covid Lockdowns Likely to Be Followed by Easing in the 2nd Half

The 10 Richest Chinese Billionaires

@rflannerychina

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