Chinese money in the US dries up as trade war drags on

The falloff in Chinese investment is affecting a range of industries in the US, including Silicon Valley startups. PHOTO: REUTERS

WASHINGTON (NYTIMES) - Growing distrust between the United States and China has slowed the once steady flow of Chinese cash into America, with Chinese investment plummeting by nearly 90 per cent since President Donald Trump took office.

The falloff, which is being felt broadly across the economy, stems from tougher regulatory scrutiny in the United States and a less hospitable climate towards Chinese investment, as well as Beijing's tightened limits on foreign spending.

It is affecting a range of industries, including Silicon Valley startups, the Manhattan real estate market and state governments that spent years wooing Chinese investment, underscoring how the world's two largest economies are beginning to decouple after years of increasing integration.

"The fact that the foreign direct investment has fallen so sharply is symbolic of how badly the economic relationship between the United States and China has deteriorated," said Eswar Prasad,former head of the International Monetary Fund's China division.

"The US doesn't trust the Chinese, and China doesn't trust the USS."

For years, Chinese investment into the United States had been accelerating, with money pouring into autos, tech, energy and agriculture and fuelling new jobs in Michigan, South Carolina, Missouri, Texas and other states.

As China's economy boomed, state and local governments along with US companies looked to snap up some of those Chinese funds.

But Trump's economic Cold War has helped reverse that trend.

Chinese foreign direct investment in the United States fell to US$5.4 billion (S$7.3 billion) in 2018 from a peak of US$46.5 billion in 2016, a drop of 88 per cent, according to data from Rhodium Group, an economic research firm.

Preliminary figures through April of this year, which account for investments by mainland Chinese companies, suggested only a modest uptick from last year, with transactions valued at US$2.8 billion.

"I certainly hear in conversations with investors a lot of concern about whether the US market is still open," said Rod Hunter, a lawyer at Baker McKenzie who specialises in foreign investment reviews. "You have a potentially chilling effect for Chinese investors."

A confluence of forces appear to be at play. A slowing economy and stricter capital controls in China have made it more difficult for Chinese investors to buy American, according to trade and mergers and acquisitions advisers.

Trump's penchant for imposing punishing tariffs on Chinese goods and an increasingly powerful regulatory group that is heavily scrutinising foreign investment, particularly involving Chinese investors, have also spooked businesses in both countries.

China, which has retaliated against US goods with its own tariffs, may also be turning off the investment spigot as punishment for Trump's economic crackdown.

Concerns about America's receptiveness to Chinese investment have been aggravated by a flurry of transactions that collapsed under heavy scrutiny from the Committee on Foreign Investment in the United States.

The group, which is headed by the Treasury Department, gained expanded powers in 2018 that allow it to block a broader array of transactions, including minority stakes and investments in sensitive technologies like telecommunications and computing.

Shortly after the new year, China's HNA Group took a US$41 million loss on a glass and aluminium Manhattan high-rise after US regulators forced it to sell the property because of security concerns about its proximity to Trump Tower, only a few blocks away.

In March, the Chinese owners of a gay dating app known as Grindr were told by regulators to find a buyer for the company. The Trump administration feared Beijing could use personal information as leverage over US officials.

Those interventions followed prominent cases earlier in Trump's term, such as Broadcom's quashed bid for Qualcomm and the sale of MoneyGram to a unit of the Chinese e-commerce giant Alibaba last year.

An agreement involving Lattice Semiconductor and an investment firm with reported ties to the Chinese government was also rejected.

In some cases, the chill has benefited US companies. In June, UnitedHealth swooped in to buy PatientsLikeMe, a health care technology startup, after the committee said it was a security risk to allow the company's Chinese owner to have access to health data. The purchase amount was not disclosed.

But the increased scrutiny is also complicating efforts by US industries to team up with Chinese investors and leading to a retrenchment in certain sectors.

The real estate sector, which has been buttressed by investors from China in the last decade, has had a steep falloff as relations sour and as Chinese officials clamp down on foreign real estate investment.

A May report from Cushman & Wakefield noted a "frenzy of disposal activity" among Chinese commercial real estate investors in the United States. In 2018, there were 37 property acquisitions by Chinese buyers worth US$2.3 billion, but US$3.1 billion of commercial real estate was sold off. The report said that the treatment of HNA and tough trade talk made Chinese investors feel unwelcome.

Chinese investors are also showing less appetite for residential real estate in the United States. Research released recently by the National Association of Realtors found that purchases of homes in America by Chinese buyers declined by 56 per cent to US$13.4 billion in the year to March.

"The magnitude of the decline is quite striking, implying less confidence in owning a property in the US," said Lawrence Yun, chief economist at the Realtors group.

Weaker Chinese investment is unlikely to derail the U.S. economy, as it is a small fraction of that from Britain, Canada, Japan and Germany. China also continues to be the largest buyer of US Treasuries; however, its holdings have fallen in recent years to US$1.1 trillion, according to the latest Treasury Department data.

But the decline in investment could hurt areas that are already economically disadvantaged and that have become dependent on Chinese cash. States like Michigan have increasingly wooed Chinese investment, resulting in new factories and jobs in a part of the country that has struggled to recover from the Great Recession.

Craig Allen, president of the U.S.-China Business Council, said the loss of Chinese investment would be felt predominantly in rural states where Chinese investors have bought factories and revived struggling businesses.

"The not-so-welcome mat is out, and it is having a deleterious effect on relatively poorer areas in the United States that need jobs," he said.

"The Chinese hear from our state and local officials that they're welcome," Allen said. "What they're hearing from federal officials is quite different."

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