Chinese Investments in the US and EU Are Declining—for Similar Reasons

09/05/2019

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Jacob Funk Kirkegaard | PIIE


            For years China has been one of the world’s most rapidlyngrowing sources of outward foreign direct investment (FDI). Since peaking in 2016, however, Chinese outward investments, primarily to the United States but also the EuropeanUnion, have declined dramatically, especially in response to changes in China’s domestic rules on capital outflows and in the face of rising nationalism in the United States (Posen 201 8). Concerns about growing Chinese influence in other economies, the ascendant role of an authoritarian government in Beijing, and possible security implications of Chinese dominance in the high-technology sector have put Chinese outward investments under intense international scrutiny.
            In the early 2000s, the Chinese government actively promoted outbound investment as part of its “Going Global”strategy, which encouraged Chinese private and state-owned enterprises to acquire technologically advanced companies in OECD countries and aggressively pursue opportunities to invest in poorer countries’ natural resource wealth and infrastructure. By 2016, China had become a major outbound
investor, with outward investments reaching over $200 billion, or almost 2 percent of Chinese GDP.
But since 2016, growing concerns over capital flight and associated depreciation pressure on the Chinese renminbi have led China to toughen restrictions on outward investment. There is also a growing perception in the United States and Europe that China under President Xi Jinping has turned back toward authoritarianism. China’s rising economic power and lingering doubts abroad about its long-term political and economic intentions have prompted US and European governments to implement several new screening and evaluation measures for foreign investments, mostly targeted (effectively if not explicitly) toward Chinese investors. These include the 2018 congressional overhaul of the US government’s Committee on Foreign Investment in the United States (CFIUS) and export control processes and the introduction of the first common inward investment framework in the European Union in 2019. As a result, Chinese investment levels, especially in the United States, have declined dramatically in recent years. Adam Posen (2018) had highlighted the decline in FDI to the United States early on.

               Chinese outward investments, especially in the United States, are unlikely to reach the peak levels of 2016 in the foreseeable future, and US and EU governments will likely never fully believe Chinese investors are implementing merely a business-driven investment strategy.
               This Policy Brief analyzes the most recent trends in Chinese investments in the United States and the European Union and reviews recent political and regulatory changes both have adopted toward Chinese inward investments. The final section explores the emerging transatlantic difference in the regulatory response to the Chinese information technology firm Huawei. Concerned about national security and as part of the ongoing broader trade friction with China, the United States has cracked down far harder on the company than the European Union.

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