China Investment In U.S. To Remain Low Amid Pandemic, Invasion Fallout: Rhodium Group

Fallout from Russia’s invasion of Ukraine will likely add to downward pressure on China investment in the United States this year.

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

Slower economic growth in China in recent years has already been weighing down inflows. “The current economic headwinds are strong and growing,” Goujon said in a telephone interview today.

Longstanding U.S. national security concerns about Chinese investment have been intensifying yet also taking on a new twist. “On the U.S. side, some recent industry comments about Chinese investment are very interesting, such as the discussion of the possible 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 Greater China member of 2022 Forbes Billionaires List unveiled this week. (See related post here.)

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

Mainland China-headquartered firms with U.S. investments notably include BYD, Fosun International, Fuyao Glass, Haier Group, Pharmaron, Tencent and Xtep.

Interview excerpts follow.

Flannery: What were your expectations for Chinese investment in the U.S. at the start of the year before Russia invaded Ukraine?

Goujon: Chinese FDI (foreign direct investment) inflows into the U.S. have remained low. The average inflow over the 2018 to 2021 period was $7 billion, compared to the 2016 peak of $49 billion 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 that we’re seeing on the Chinese side and the national security factors that are influencing things on the U.S. side.

Most of the FDI, as you would expect, went to non-sensitive sectors such as entertainment and real estate. One transaction was about 60% of the total – the Tencent-led consortium’s purchase of a 10 % stake in Universal Music Group. Another key feature last year was that state-owned investors were pretty much out of the picture. Private firms represented some 97% of all FDI in 2021, according to our figures. Again, not surprising, but a pretty profound trend.

At this point, the VC trend is still relatively strong. That focus is mainly on health, pharma and biotech – around $3 billion to $4 billion. We didn’t see any uptick in green field investment in the U.S. last year or much of a pipeline there, in contrast to the trend that we’re seeing with Chinese FDI in Europe which actually saw a big boost in 2021. That’s something to watch moving forward.

Looking forward, we don’t expect a big boost in Chinese FDI in the U.S. for 2022. Several factors are driving that. Tight capital controls in China and strict zero-Covid policies are (limiting) Chinese outbound investment. With Covid, investors can’t travel as much as they used to (nor) able to scope out their investments and make deals. The current economic headwinds are strong and growing. The slowdown in the property sector and dampened household consumption already will exacerbate those issues, beyond Covid.

There are questions about how much bang will Beijing actually get in its stimulus. They’re promising 5.5% GDP growth. We think that’s completely unrealistic, but there are a lot of expectations on the stimulus. And what will be the return on that investment? Given the recent selloffs (of foreign equity positions), we’re concerned over capital outflows. Investors are associating Russia’s (relationship with) China as a sort of Eurasian alignment. You see risk sentiment influencing investments as China tries to maintain a balancing act between politically leaning toward Russia and mitigating secondary actions risk.

Those are part of the number of reasons why we would expect the trend of low Chinese FDI to U.S. to continue. We also have to watch for adaptations to the zero-Covid strategy in China. We’re still months out before we actually see some really critical things come into play like adoption of homegrown mRNA vaccine in China. If we see that Covid crisis become more acute, let’s see if there’s some easing on the distribution of the Pfizer vaccine.

On the U.S. side, some recent comments about Chinese investment are very interesting, such as the discussion of the possible CATL investment in North America. There is in the U.S. almost a mirroring of Chinese behavior in (discussions about) strategic supply chain vulnerability and the idea that you would provide market access in return for transferring technology and using U.S. labor. That’s a pretty loaded negotiating point between the U.S. and China.

This is going to be a fascinating area to watch. U.S. investors look at Chinese industrial policy and think about what are safer areas to invest in and how to follow a trend line of where the (Chinese) state is putting a lot of its energy and resources and where they don’t cross U.S. red lines on restrictions. Now, Chinese are looking at it from the flip side. What has the U.S. identified as its supply vulnerabilities and where can Chinese investors can try to follow that trend line without crossing red lines?

Another factor here is the confirmation of Alan Estevez to be Under Secretary of Commerce for Industry and Security. There is lot of pressure on him and his agency to list foundational technologies — not just with regard to inbound investment, but also for emerging policy on outbound investment. That’s another thing to watch as the U.S. adds more definition to trade and investment restrictions.

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China Covid Lockdowns Likely To Be Followed By Easing In 2nd Half

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@rflannerychina