Chinese FDI into US slumps as tensions grow

Chinese FDI into the US dropped to $5bn in 2018, from $29bn a year earlier, according to a report from law firm Baker McKenzie in partnership with research provider Rhodium Group.

After reaching a peak of $45bn in 2016, Chinese FDI into the US has decreased due to “continued restrictions on outbound transactions in China, tighter US foreign investment reviews, and a tense bilateral relationship between both countries”, found the report.

The introduction of new investment screening measurements has played a key role in the curtailment of Chinese FDI inflows. In particular, there was a “surge of regulatory interventions in North America, mostly due to policy adjustments in the USA” explains the report, as US president Donald Trump intensified an unfolding trade feud with Beijing and increased the screening and intervention powers of the Committee on Foreign Investment in the United States (CFIUS). Overall, financial regulators cancelled 14 deals in North America originating from Chinese companies, worth an estimated $4bn, in 2018, the report says. In response, Chinese companies “increasingly stayed away from potentially problematic deals” due to regulatory uncertainty.

“There may have been an over-correction in the market, perhaps caused by confusion of the trade conflict with investment policy. US investment regulation remains exclusively focused on national security, and CFIUS has continued to approve Chinese investments even in the technology space,” said Rod Hunter, international trade partner in Baker McKenzie’s Washington, DC office. “The recent US legislation included a number of ‘good government’ reforms to ensure a more predictable CFIUS process – for example, clearer timelines and staffing increases funded by users’ fees.”

At the same time, a sharp increase in Chinese divestments has impacted net Chinese FDI into the US and around the world. As a result of new domestic regulations on outbound trade and private companies, Chinese investors have divested their overseas assets at an unprecedented rate. In 2018, Chinese companies divested nearly $13b in North America with the majority of divestments impacting US “real estate, hospitality, and entertainment assets,” said the report.

Looking forward, further clarification concerning US and Chinese regulatory policies will help strengthen foreign investment and ease trade tensions. “[There is] a possible upside in North America if talks can move towards resolving trade conflict as well as concerns over the CFIUS process ease,” said Bee Chun Boo, M&A partner at Baker McKenzie.