Chinese investment in the US is slowing primarily because Chinese outbound investment (ODI) is slowing in general, due to a slowing economy, not because Trump has blocked some trade deals on the grounds of "national security".

According to MSN, “Chinese investment in the US could grind to a halt”.[1] Chinese investment in the US is slowing because Chinese outbound investment (ODI) is slowing in general, due to a slowing economy. The Economist Intelligence Unit reported that after having peaked in 2016, overall China outbound investment was down 40%, year-on-year, in 2017.[2] The American Enterprise Institute reported that although Chinese investment in the US had dropped 55% in 2017, it was still the second highest year of received Chinese ODI ever recorded.[3] The US slipped only one notch, behind Singapore, becoming the second largest recipient of Chinese ODI.[4]

The MSN article goes on to say, “Some 2.6 million U.S. jobs rely on the U.S.-China trade relationship.”[5] And while this may be true, trade and investment are nearly unrelated. Reducing investment does not necessarily reduce trade. As MSN reports, according to recent research from Oxford Economics, “About 43,000 (jobs) are tied to China’s direct investment in the U.S.”[6] While this is true, existing investments and jobs should not be effected by a slowdown of future investment.

Next, the article blames Trump for halting some Chinese deals in the US: “President Donald Trump has made it clear that any financial deals that could be linked to China are off the table.”[7] However, Trump has not ceased all Chinese investment in the US, only investment that his administration has determined endangers national security, such as China taking large stakes in financial institutions or buying defense related technology.

An example of a deal which the president stopped, by way of presidential order, was the $580 million acquisition of Massachusetts-based Xcerra, a semiconductor testing company, by Sino IC Fund, a Chinese state-backed fund.[8] Another sensitive technology is lidar, a laser pulse navigating system which is essential for self-driving vehicles. In 2016, Chinese internet giant Baidu acquired a sizeable chunk of American lidar specialist Velodyne. This deal has raised eyebrows in Washington, however, because lidar technology also has military applications, such as for the operation of drones.[9]

Many of the Chinese companies investing in US technology or financial sector firms are state owned enterprises (SOE) or firms which have close ties to the government. And even those investments made by nominally private enterprises (POE) may have been carried out at the request of the government, as part of a larger strategic investment plan.[10] Consequently, Rep. Robert Pittenger (Republican, North Carolina) is currently leading a team which is modernizing the Committee on Foreign Investment in the United States (CFIUS). As the Congressional Research Service explains, “CFIUS is an interagency body comprised of nine Cabinet members, two ex officio members, and other members as appointed by the President, that assists the President in overseeing the national security aspects of foreign direct investment in the U.S. economy.”[11] In US history, CFIUS has only recommended that four deals be stopped, and in all four instances, the president has utilized a presidential order to cancel those deals. Rep. Pittenger said, an overhaul of CFIUS is needed to counter China’s “well-coordinated, government-driven effort to exploit our laws to acquire military-applicable technologies used to modernize their army and intelligence agencies”.[12]

Apart from issues of national defense, Trump has also called for reciprocal market access. Chinese companies have taken large stakes in US investment banks, whereas the reverse would be prohibited under Chinese law. And, Chinese state owned firms or state-invested firms can make acquisitions in the US, something that would be unthinkable in China. One of the reasons for the US trade deficit with China is that China prohibits US firms from accessing certain sectors of the Chinese economy, but the US does not limit access by sector for Chinese firms. In China, whole sectors are closed to foreign investment, whereas in the US deals are evaluated on a case by case basis. This means that even in sensitive sectors, the US may approve a Chinese deal as long as that deal was deemed to pose no threat to national security.

A Center for Foreign Relations report stated that, “Though Chinese investors trying to purchase U.S. firms face low regulatory hurdles, the obstacles facing U.S. firms in China are much greater. U.S. banks operating in China, for instance, often cannot use the local currency; firms in other sectors face concerted challenges, from forced technology sharing to mandatory joint ventures, that foreign firms in the United States are not subjected to.”[13]

The American Enterprise Institute suggests that Chinese investment in the US could be mutually beneficial to both countries provided that Chinese ODI adhere to certain restrictions: “Chinese firms and individuals should not be allowed to buy advanced technology that could have military uses. Chinese firms that receive stolen intellectual property should be punished…. In particular, Chinese firms cannot be trusted with [sic] confidential personal data.”[14]

In July 2017, the Council on Foreign Relations’ Maurice R. Greenberg Center for Geoeconomic Studies held a workshop to explore the scale and scope of Chinese investment in U.S. technology, its national security implications, and potential policy responses. The conclusion which most participants agreed upon was that “U.S. policymakers should therefore seek to make reciprocity—more equal access in China for U.S. investors, banks, and firms—a priority objective.”[15]

By increasing regulations and by blocking some deals, the Trump administration seeks to create what is viewed as a more even playing field for US companies, while seeing after matters of national security.

References

[1] Irina Ivanova, Chinese investment in the US could grind to a halt 5 / 25, March 15, 2018, MSN, https://www.msn.com/en-us/money/markets/chinese-investment-in-the-us-could-grind-to-a-halt/ar-BBKbUcr?li=BBnbfcN

[2] The Economist Intelligence Unit, China Going Global Investment Index 2017, The Largest The Economist, http://pages.eiu.com/rs/753-RIQ-438/images/ODI_in_China_2017_English.pdf

[3] Derek Scissors, Chinese investments in the United States, January 24, 2018, American Enterprise Institute, https://www.aei.org/feature/china-tracker

[4] The Economist Intelligence Unit, China Going Global Investment Index 2017, The Largest The Economist, http://pages.eiu.com/rs/753-RIQ-438/images/ODI_in_China_2017_English.pdf

[5] Irina Ivanova, Chinese investment in the US could grind to a halt 5 / 25, March 15, 2018, MSN, https://www.msn.com/en-us/money/markets/chinese-investment-in-the-us-could-grind-to-a-halt/ar-BBKbUcr?li=BBnbfcN

[6] Irina Ivanova, Chinese investment in the US could grind to a halt 5 / 25, March 15, 2018, MSN, https://www.msn.com/en-us/money/markets/chinese-investment-in-the-us-could-grind-to-a-halt/ar-BBKbUcr?li=BBnbfcN

[7] Irina Ivanova, Chinese investment in the US could grind to a halt 5 / 25, March 15, 2018, MSN, https://www.msn.com/en-us/money/markets/chinese-investment-in-the-us-could-grind-to-a-halt/ar-BBKbUcr?li=BBnbfcN

[8] Seth Fiegerman and Jackie Wattles, Trump stops China-backed takeover of U.S. chip maker, September 14, 2017, CNN, http://money.cnn.com/2017/09/13/technology/business/trump-lattice-china/index.html. Alice Woodhouse and Ben Bland, US regulators block China semiconductor deal, February 23, 2018, The Financial Times, https://www.ft.com/content/b3bfe924-1854-11e8-9e9c-25c814761640

[9] Elias Groll and Keith Johnson, Washington Strikes Back Against Chinese Investment, A new bill moving forward on Capitol Hill would expand regulators’ ability to block Chinese acquisitions — and U.S. ventures abroad, March 6, 2018,Foreign Policy, http://foreignpolicy.com/2018/03/06/washington-strikes-back-against-chinese-investment/

[10] Chinese Investment in Critical U.S. Technology: Risks to U.S. Security Interests, October 16, 2017, Insights From a CFR Workshop, Greenberg Center for Geoeconomic Studies, https://www.cfr.org/report/chinese-investment-critical-us-technology-risks-us-security-interests

[11] James K. Jackson, The Committee on Foreign Investment in the United States (CFIUS), March 13, 2018, https://fas.org/sgp/crs/natsec/RL33388.pdf

[12] Elias Groll and Keith Johnson, “Washington Strikes Back Against Chinese Investment: A new bill moving forward on Capitol Hill would expand regulators’ ability to block Chinese acquisitions — and U.S. ventures abroad,” March 6, 2018, Foreign Policy, http://foreignpolicy.com/2018/03/06/washington-strikes-back-against-chinese-investment/

[13] Chinese Investment in Critical U.S. Technology: Risks to U.S. Security Interests, October 16, 2017, Insights From a CFR Workshop, Greenberg Center for Geoeconomic Studies, https://www.cfr.org/report/chinese-investment-critical-us-technology-risks-us-security-interests

[14] Derek Scissors, Chinese investments in the United States, January 24, 2018, American Enterprise Institute, https://www.aei.org/feature/china-tracker

[15] Chinese Investment in Critical U.S. Technology: Risks to U.S. Security Interests, October 16, 2017, Insights From a CFR Workshop, Greenberg Center for Geoeconomic Studies, https://www.cfr.org/report/chinese-investment-critical-us-technology-risks-us-security-interests