There was a time, not so long ago, when many U.S. economists were warning that the Chinese government’s purchases of U.S. Treasuries were a threat to the dollar’s position as the global economy’s benchmark currency. In December, Chinese holdings dropped to $1.138 trillion, well below a 10-year high of $1.32 trillion in November 2013, and the fifth straight month of declines.
Another sign that China is reining its enthusiasm for all things American, foreign direct investment (FDI) in U.S. assets dropped to just $4.8 billion in 2018, down 84% from $29 billion in 2017 and 90% from a record-high $46 billion in 2016. According to researchers at Rhodium Group, the 2018 total is lowest in seven years.
The calculus gets worse if 2018 asset divestitures of $13 billion are taken into account. Net Chinese FDI in U.S. assets turns negative by $8 billion.
Rhodium Group attributes the sharp decline to government policy changes. Controls remain tight on outbound capital, and the Chinese government is making a major effort at deleveraging, which in turn curbs liquidity and forces Chinese firms to think first about consolidating their debt rather than expanding overseas.
U.S. scrutiny of Chinese investments in U.S. firms also has been ratcheted up during the Trump administration. Rhodium Group notes that abandoned transactions resulting from unresolved national security concerns hit an all-time high last year. Add to that Chinese investors’ decreasing appetite for U.S. investments thanks to the administration’s trade barriers and more adversarial approach to China.
Ironically, perhaps, while Chinese investors withdrew $13 billion from U.S. assets last year, the country’s venture capital investment rose by $1 billion to a record-high $3.1 billion year over year. Battery maker Farasis Energy, gaming company Epic Games and biotechnology firms Grail and Viela Bio were among the beneficiaries.
The outlook for Chinese FDI in 2019 remains clouded. U.S. regulators have approved a $2.7 billion takeover of Genworth Financial, which is expected close in the first half of the year. But Chinese government policy related to deleveraging is not expected to change, and Rhodium Group projects divestments totaling more than $20 billion in U.S. assets this year.
The outcome of the current talks between the United States and China is an important variable. If an agreement can be reached, deals in sectors not related to national security (e.g., health care) may see an increase in Chinese investment.
Visit the Rhodium Group website to read the full report.