The astonishing retreat of Chinese investment in America
Just a few years ago, Chinese investors and U.S. markets were really hitting it off. Direct Chinese investment into the United States rose to a whopping $46 billion in 2016.
Then the romance ended just as quickly. From 2016 to 2017, the flood of money shrunk by around 50 percent. And while 2018 isn't over yet, the breakup has continued: From the first half of 2017 to the first half of this year, Chinese investment fell over 90 percent. It now sits around $2 billion. David Firestein, the founder of the China Public Policy Center at the University of Texas, called the drop "probably unprecedented" in an interview with The Week.
In fact, if you include divestitures, so far this year, more Chinese money has actually flowed out of America than in — by about $7.8 billion.
So what happened? And what will the effect be here in America?
Let's take the questions in order.
One reason Chinese foreign investment has dried up is — you guessed it — President Trump.
Under this president, the Committee on Foreign Investment in the United States (CFIUS) — the U.S. regulatory body charged with policing foreign investment — has become much more hawkish. And several major deals involving Chinese investors were called off in the first part of 2018, with players citing issues with CFIUS.
Partly this is due to Trump's bellicose America-first ideology and his general hostility to all things foreign. The president was actually contemplating a far more sweeping use of emergency powers to regulate Chinese investment, and then backed off that idea in favor of using the CFIUS earlier this summer.
But part of the shift in regulatory oversight is also due to real concerns with China's sometimes behavior: It doesn't always hold intellectual property law in high regard, and it's shown an interest in expanding its own geopolitical might by moving into technologies sensitive to American national security, for example. Based on those concerns, Congress actually just passed new laws to strengthen CFIUS's hand.
Facing more regulatory barriers and a harsher political spotlight, many Chinese investors may have simply concluded that entering the U.S. market is more trouble than it's worth. Meanwhile, the flow of Chinese deals into Europe is growing, even as its engagement with the U.S. dries up.
But another important reason Chinese investment is disappearing doesn't have much to do with U.S. policy at all.
It turns out the precipitous drop after 2016 is just the flipside of an equally precipitous spike after 2015. If you look at Chinese investment in the U.S. over the last decade, it hasn't fallen off a cliff so much as regressed to its mean.
What happened was that the Chinese government actually loosened up rules regarding outbound investment in 2014. This was part of a larger push to expand Chinese investment overseas, and promote its One Belt One Road project. Then in 2015, the government suddenly devalued the yuan, which probably panicked many Chinese investors. So they started buying up assets overseas to protect their wealth.
In short, the Chinese government may have gotten more than it bargained for. Its push to promote Chinese economic prowess abroad transformed into concerns that Chinese companies were overextending themselves, taking on too much debt to purchase assets, and, in some cases, even serving as cover for raw capital flight and corruption by Chinese elites.
In fact, almost two-thirds of the 2016 spike was driven by just four major Chinese companies. By the end of 2016, officials at those four companies were facing much closer scrutiny. And in 2017, the Chinese government cracked down with much more stringent capital controls on outbound investment.
So what does this mean for the U.S.? "It's kind of a mixed bag,” Firestein said.
From a 30,000-foot macroeconomic perspective, more investment generally leads to more jobs, while less investment leads to fewer. So in theory, the disappearance of Chinese investment could be bad for employment.
However, in reality it's a bit more complicated. For instance, even in sectors like tech, where Chinese investment is prominent, and now prominently slowing down, not that much money ever came from China in the first place. Meanwhile, capital remains extraordinarily cheap, so if market opportunities exist, then other investors will come in — either from other countries, or from domestic capital, or from bank loans — as Chinese investors specifically pull out. From an American. perspective, the Chinese exodus couldn't be better timed.
And if you drill down to specific industries, there might even be benefits.
For instance, Chinese buyers were the top foreign purchasers of U.S. real estate for 2015, 2016, and 2017. Over two-thirds of them paid in cash, they sometimes paid anywhere from 40 percent to 60 percent above the asking price, and they often bought the homes purely as an investment vehicle (i.e. they don't live in it, so it just sits there). Again, Chinese buyers aren't a huge portion of the market. But they matter. This kind of hot demand can push up prices and further exacerbate the housing affordability problem. So if Chinese owners start selling off American real estate that could be a good thing for American home buyers.
Like all relationships, neither side in this one is perfect. China can be aggressive, and America is having something of a nationalist panic attack. Meanwhile, the breakup is due as much to each side's internal issues as their flaws grating on each other.
As to whether American markets and Chinese investors will be happier apart than together? Only time will tell.