China’s Investment In US Faces New Challenges – Analysis

By Michael Lelyveld

Chinese investment in the United States is headed for a steep drop this year after a record surge in 2016, analysts say.

The expected decline is the result of a combination of factors including political concerns in Washington and increased vigilance in China over capital outflows.

Even without those influences, Chinese investment in the United States may be due for a downward correction after an unprecedented buying binge last year.

Two leading investment data services have reported similar totals for the 2016 bonanza.

According to initial estimates by the China Global Investment Tracker compiled by the American Enterprise Institute (AEI) and the Heritage Foundation, China’s investment in the U.S. market nearly tripled last year to U.S. $55 billion (378 billion yuan).

The China Investment Monitor of the New York-based Rhodium Group counted U.S. $45.6 billion (313.7 billion yuan) in 2016. Despite different definitions, the analysts agree that China’s spending in the United States last year was equal to about half of all its previous investments in the country since tracking began over a decade ago.

China’s appetite for American assets including hotels, real estate, entertainment and technology is even more remarkable when measured against the Ministry of Commerce official global total of U.S. $170.1 billion (1.1 trillion yuan) in non-financial outbound direct investment (ODI) last year.

The jump in U.S. investment accounted for as much as a third of China’s worldwide ODI and two-thirds of its 44-percent increase.

But the big wave of Chinese money flowing into the U.S. market seems unlikely to be repeated this year.

“The investment in the United States is going to drop. No question,” said Derek Scissors, an Asia economist and AEI resident scholar in Washington.

“We won’t allow it. Even if the Chinese allowed it, we wouldn’t allow it,” he said.

The Rhodium Group sees some spillover from 2016, since Chinese companies are awaiting final regulatory approvals or financing for U.S. $21 billion (144 billion yuan) of U.S. deals. But these will have to overcome greater resistance this year.

“While the economic fundamentals and the deal pipeline suggest that 2017 will be another boom year for Chinese investment in the U.S., the political realities on both sides pose a major downside risk to both pending transactions as well as the pace of newly announced investments in coming months,” Rhodium analysts said in a report.

A slowdown in deals

The slowing of deals in the United States is only part of the expected decline in China’s total ODI.

In interviews with The Wall Street Journal, economists at the Chinese Academy of Social Sciences estimated that ODI would return to the 2015 level of about U.S. $118 billion (812 billion yuan), a drop of some 30 percent from last year.

One major reason is China’s concern about capital outflows, which have pressured both its currency and its foreign exchange reserves.

As Chinese capital is drawn toward the stronger currency and rising interest rates of the United States, the People’s Bank of China (PBOC) has spent heavily on defending the yuan, dragging forex reserves down to U.S. $3.01 trillion (20.7 trillion yuan) from a high of U.S. $3.99 trillion (27.4 trillion yuan) in mid-2014.

To slow the outflow, the PBOC and government agencies have ordered close reviews of overseas investments to bar currency speculation.

On Jan. 1, the State Administration of Foreign Exchange (SAFE) extended the curbs to individuals, requiring citizens to pledge that exchanges of yuan for foreign currency would not be used for overseas purchases of “property, securities, life insurance” or other investments.

It is unclear how effective such restrictions will be.

On Jan. 16, a report by the Hurun Research Institute found that nearly half of Chinese citizens with assets valued at over 10 million yuan (U.S. $1.45 million) already own an average of 2.3 houses overseas, the official Xinhua news agency said.

Over half of the investors in foreign property cited access to schooling as a reason for their purchases but also noted “the need to hedge against risks,” the report said.

How big a part similar risks played in last year’s major investments in the United States is anyone’s guess, but Scissors estimated that currency risks could have accounted for as much as 35 percent.

Hotel and entertainment acquisitions

An examination of the deals listed chronologically by the China Global Investment Tracker suggests that a flurry of U.S. investments came together at intervals, roughly corresponding to spikes in China’s currency concerns.

While technology acquisitions were most likely to have been pursued for strategic reasons, those in other sectors like hotels and entertainment have come under scrutiny.

Late last year, the PBOC and SAFE said they were “closely monitoring the tendency of ‘irrational’ overseas investment in some areas.”

In a joint statement, the agencies pointed to outbound investments in real estate, hotels, cinemas, entertainment, and sports as “examples of this tendency,” Xinhua reported at the time.

China’s big investments in hotels may have been especially influenced by currency fluctuations, said Scissors.

“Tourist demand and the profitability of the hotel industry did not change that dramatically in one year,” he said. “What happened was, … once somebody bought one, a number of people bought them and they started soliciting the Chinese for hotels. And that’s a way to get money out of the country.”

Even without the currency crackdown, China’s investments in the United States may face greater resistance this year under the administration of President Donald Trump, who has threatened to charge it with currency manipulation and impose tariffs on its exports.

China’s acquisitions are expected to face tougher scrutiny by the Committee on Foreign Investment in the United States (CFIUS), a government agency that reviews foreign deals for national security implications.

The Rhodium Group cited “serious efforts underway on Capitol Hill to prepare legislation that would expand the mandates of CFIUS to review Chinese and other foreign transactions.”

Last September, a bipartisan group of U.S. House members led by Rep. Robert Pittenger, Republican of North Carolina, urged the Government Accountability Office (GAO) to determine whether the authority of CFIUS should be updated to keep pace with the “growing scope of foreign acquisitions” in sectors of concern, including telecommunications, media and agriculture.

In particular, the group cited investments by “Chinese companies designated as ‘state champions’ that often benefit from illegal subsidies to gain strategic access to markets like the U.S.” On Oct, 4, the GAO agreed to conduct the review.

Greater restrictions

It is unclear whether China’s big investors in the U.S. market have gotten the message that they may face greater restrictions or whether they expect them to be enforced.

On Jan. 19, Reuters reported that the Paramount Pictures subsidiary of Viacom Inc. will receive U.S. $1 billion (6.8 billion yuan) in investment from Shanghai Film Group and Huahua Media. The cash will finance 25 percent of Paramount’s films for the next three years, Reuters said, citing a “source familiar with the situation.”

But reactions to last year’s surge in spending suggest that China’s investment in the United States will face rising pressure from both sides.

Ironically, the higher hurdles for foreign investment could slow the pace of China’s capital flight and depreciation of its currency, perhaps easing pressure for retaliatory trade measures against its exports.