Two-Way Foreign Direct Investing - China and the United States

With the Trump Administration making repeated moves in its trade agenda, China has appeared as one of the key targets in Washington's attempts to regain some semblance of trade balance.  A study by the National Committee on U.S. - China Relations and the Rhodium Group looks at a little-discussed aspect of trade between China and the United States, that of foreign direct investment (FDI) in each other's economies.

Let's open by quoting from the introduction to the report, outlining why two-way investment flow is so important:

"A clear-eyed analysis shows that both the United States and China have an economic interest in maintaining strong investment ties. Both have communities that have experienced tremendous job creation and economic growth as a direct result of two-way FDI flows."

By declaring China as a rival in both trade and militarily, the United States strategy has become strongly confrontational, similar to how trade and investment with Japan were viewed in the 1980s.

Let's start by looking at United States' direct foreign investments in China.  From the end of the Second World War until 1979, China was generally closed to U.S. investment.  This began to change modestly in the 1980s and accelerated in the early 1990s as China undertook measures to reform its economy, allowing increased investments by American companies.    After China acceded to the World Trade Organization in 2001, annual American investments in China grew markedly as you can see on this graphic which shows the annual value of American FDI transactions in China:

By the end of 2017, the total cumulative value of U.S. foreign direct investments in China surpassed $256 billion, hitting $14 billion in 2017.  As well, U.S. firms tend to prefer to invest in greenfield projects, those projects which are built from the ground up rather than acquisition of existing facilities (brownfield).  By the end of 2017, almost 1,400 U.S. companies had invested in China with 400 firms investing more than $50 million each, 300 firms investing more than $100 million and 65 companies investing in excess of $1 billion.

Here is a listing of cumulative U.S. FDI transactions in China for the top ten industries (by investment totals) since 1990:

Information and Communications Technology - $41.3 billion

Chemicals, Metals and Basic Materials - $31.1 billion

Automotive and Transportation Equipment - $24.1 billion

Energy - $21.8 billion

Financial and Business Services - $21.5 billion

Machinery - $19.6 billion

Agriculture and Food - $19.5 billion

Real Estate and Hospitality - $18.2 billion

Health, Pharmaceuticals and Biotechnology - $15.6 billion

Consumer Products and Services - $14.8 billion

In 2017, the largest U.S. foreign direct investment in China was in Information and Communications technology where U.S. companies invested a total of $4.1 billion.

Now, let's look at China's direct foreign investments in the United States.  Chinese FDI in the United States was insignificant before 2005 when Lenovo purchased IBM's personal computer division for $1.75 billion, the first major modern investment by China in the United States.  In the first wave of purchases prior to 2010, China's government-owned or government-affliliated enterprises accounted for more than 80 percent of China's investments in the United States, a share which fell to 29 percent by 2016.  In 2010, Chinese investments in the United States began to grow rapidly reaching a record $46 billion in 2016 before falling back to $29 billion in 2017, a 35 percent year-over-year drop, as shown on this graphic:

By the end of 2017, the total cumulative value of Chinese foreign direct investments in China reached $140 billion, well below the $256 billion that the U.S. has invested in China.  One issue that is slowing Chinese investments in the U.S. is increased investment screenings by the Committee on Foreign Investment in the United States, largely as a retails of changing threat assessments.  As well, in contrast to American firms which prefer to invest in greenfield projects, Chinese firms prefer to invest in existing companies through acquisitions. 

Here is a listing of cumulative Chinese FDI transactions in the United States for the top ten industries (by investment totals) since 1990:

Real Estate and Hospitality - $40.90 billion

Information and Communications Technology - $16.7 billion

Transportation and Infrastructure - $16.6 billion

Energy - $13.8 billion

Entertainment, Media and Education - $9.5 billion

Financial and Business Services - $7.2 billion

Healthcare, Pharmaceuticals and Biotechnology - $6.3 billion

Electronics and Electrical Equipment - $5.2 billion

Automotive and Transportation Equipment - $4.5 billion

Chemicals, Metals and Basic Materials - $2.7 billion

In 2017, the largest Chinese foreign direct investment in the United States was in Real Estate and Hospitality where Chinese companies invested $11.0 billion, nearly one-third of China's total FDI in the U.S.  This is largely due to HNA's massive $6.5 billion investment in Hilton Hotels.

Let's summarize by looking at this graphic which shows the total foreign direct investments by both China and the United States in each other's economies since 1990:

U.S.-based companies total direct investment in China - $256 billion

China-based companies total direct investment in the U.S. - $140 billion

The nearly one-quarter of a trillion dollars worth of investment by American companies in China, primarily in new developments (i.e. greenfield projects), is one-quarter of a trillion dollars worth of investment that is not taking place in the United States.  While we will never know, it would be interesting to have an actual assessment of the number of jobs that an investment of that size would have created in the United States.  Instead of investing in "the homeland", Corporate America has chosen to create jobs in China where labor costs are far lower than in the United States.  Perhaps when it comes to America's trade and manufacturing problems, Washington really is barking up the wrong tree.