Outlook for US-China direct investment fragile: Report

Two-way investment already being hit by trade war fears

Two-way business investment is likely to be hit this year because of the more contentious relationship between China and the US, a new report has said.

Fears of a looming trade war, along with investment restrictions, have already hit foreign direct investment (FDI) between the world's two largest economies, the non-profit National Committee on United States-China Relations said in a report released yesterday.

Two-way FDI fell to US$43.4 billion (S$56.8 billion) last year, down from record US$60 billion in 2016.

The decline was the result of Chinese investment in the US falling by more than one-third to US$29 billion from US$46 billion in 2016, and would have been steeper if not for US$18 billion in Chinese acquisitions announced in 2016 but completed last year.

American FDI into China remained flat at about US$14 billion last year.

"The outlook for two-way investment is fragile as Washington and Beijing reassess the foundations of the economic and political relationship," said Mr Thilo Hanemann, a director of US consulting firm Rhodium Group and one of the authors of the report.

Mr Hanemann noted that policy and politics, rather than commercial reasons, were responsible for the decline in investment.

China, for instance, tightened controls on capital outflows last year in a bid to manage financial risks, and later codified rules to curb what it called "irrational" overseas investments.

As the yuan recovered and worries over capital flight subsided, Beijing "gradually loosened the leash on corporate outbound investment", he said. But Beijing retained the discretion to approve deals, and greater scrutiny has dampened the enthusiasm of investors.

More worrying is the growing number of regulatory hurdles that Chinese firms face in the US, as evidenced by a series of failed deals in 2017 and early this year, said the report. A merger between China's Ant Financial and US money transfer company MoneyGram International was rejected by Washington over national security concerns in January, as was the US$117 billion bid by Singapore-based Broadcom for chipmaker Qualcomm.

Growing uncertainties as the US looks to strengthen the powers of the Committee on Foreign Investment in the United States has already hit deal appetite, said the report. It noted that there was less than US$5 billion of pending Chinese acquisitions at the end of the first quarter of this year, the lowest in three years.

"The strategic reassessment of the US-China economic relationship driven by the Trump administration could further impact US receptiveness to Chinese FDI," it said.

The administration's linking of the economy with national security more closely than before presages more confrontational measures, including in FDI, the report added.

The Trump administration has said the forced transfer of technology is at the heart of the dispute with China. But Chinese experts believe otherwise, citing greater competition from Chinese firms and rising mistrust for the US moving to increase protectionism, especially over its high-tech industries.

"The growing FDI figure has been an area of positivity in the Sino-US relationship in recent years, but with mistrust on the rise because of trade disputes, something that is good may be viewed in a reverse way - as a growing threat to national security," said Professor Jia Qingguo, dean of the School of International Studies at Peking University.

What is at stake, in the event of a trade war, is not just future growth, but also almost US$400 billion in cumulative two-way FDI that the US and China have accrued over the years, said the report.

"More all-encompassing, expansive ideas about expunging foreign participation in the US economy, particularly Chinese, would not only foreclose that growth but also diminish existing investments," it said. "The welfare implications of such a course of action are uncharted."

A version of this article appeared in the print edition of The Straits Times on April 11, 2018, with the headline 'Outlook for US-China direct investment fragile: Report'. Print Edition | Subscribe