American and Chinese investors' willingness to deploy capital into each other's countries has plummeted to a five-year low amid escalating trade tensions between the two countries, according to a new study by research firm Rhodium Group.
Two-way foreign direct investment (FDI) between the US and China fell 18% YoY to $13 billion in 1H19 and approached levels not seen since 1H14.
The souring mood between both countries reflects an increasingly uncertain economic environment that has intensified a synchronized global slowdown.
"China is also facing macroeconomic pressures that make it unlikely Beijing will loosen outbound capital controls anytime soon. These controls also remain a major hurdle for foreign firms and portfolio investors (especially those with fiduciary duties).," the report said.
Merger and acquisition activity by Chinese firms in the US dropped somewhat sharply in 1H19 as Beijing tightened outbound capital controls to address increasing financial risks and macroeconomic concerns mounting in its domestic markets.
"Beijing's outbound direct investment controls and its crackdown on highly leveraged private investors continued to weigh on Chinese FDI in the US. A deliberate tightening of liquidity in China's financial system further exacerbated headwinds, forcing firms to clean up their balance sheets instead of investing abroad," the report said.
The downturn has also been the result of a more stringent deal inspection of foreign acquisitions imposed by the Trump administration.
Chinese FDI in the US soared to $46 billion in 2016 thanks to a series of multi-billion dollar deals and reverted to more moderate levels around $29 billion in 2017. By 2018, it crashed to just $5 billion, and by 1H19, only $3.1 billion.
One of the most significant pullbacks of Chinese FDI into the US was in property and hospitality, where it fell to $280 million in 1H19, from $8.66 billion in 1H16, a 97% crash in three years.
Numerous Chinese firms were reported to have plans in establishing manufacturing facilities in the US to avoid tariffs. However, the deepening trade war changed all of that, and many have reworked supply chains into Southeast Asia, said Rhodium.
Bitmain Technologies Ltd., a multinational semiconductor company based in Beijing, considered investing $500 million into new US operations but has since frozen the project because of the trade war.
Chinese firms divested $13 billion worth of US investments in 2018, and there was at least $20 billion in pending sales by 4Q18. HNA, Anbang and Wanda, were three Chinese companies selling the most US assets last year. Because of the elevated divestitures, Chinese net FDI inflows to the US were negative $8 billion in 2018.
Developments in Sino-American relations influence the number of investments that flow between both countries. President Trump imposing a 10% tariff on another $300 billion of Chinese goods beginning Sept. 1 will continue to reduce FDI in both countries.