US-China decoupling accelerates in first quarter of 2020

Decoupling between the US and Chinese economies shifted into overdrive in the first quarter of this year, as the commercial impact of coronavirus exacerbated what some analysts are calling a “cold war” chill in ties between the countries.

The value of newly announced Chinese direct investment projects into the US fell to just $200m in the first quarter of this year, down from an average of $2bn per quarter in 2019, according to a report by research firm Rhodium Group and the National Committee on United States-China Relations, a non-governmental organisation.

The fall comes after Chinese direct investment in the US dropped to the lowest level since 2009 last year — down from $2.7bn a quarter in 2018 and $8bn a quarter in the boom years of 2016 and 2017 — amid souring bilateral ties.

Total Chinese direct investment into the US stood at $5bn, a slight drop from $5.4bn in 2018 and well off a recent peak of $45bn in 2016, when Chinese companies were much more free to acquire US counterparts, the report said.

“Both Washington and Beijing have blamed each other for failing to adequately respond to the virus, deepening the political and economic tensions that already existed in the relationship,” the report said.

“The worsening bilateral relationship and a growing public backlash against China in the US make it likely that Chinese buyers will also face significant political opposition to any big acquisition,” the report added.

Some analysts saw little optimism for an improvement in relations.

“The discontent in the US arising from the tech revolution and globalisation is so high that politicians have been looking, and will continue to look, for ways to exploit it,” said Chen Zhiwu, a professor at the University of Hong Kong. “The new cold war has been going on for a few years, with little trust left between the two. It would take a miracle for this to be reversed.”

Chinese venture capital investments into the US also fell off a cliff, slumping from $4.7bn in 2018 to $2.6bn last year. The sharp drop came against a backdrop of tightened scrutiny by the Committee on Foreign Investment in the United States and a range of economic factors.

US venture capital investments into Chinese companies declined to an estimated $5bn, down sharply from $19.6bn in 2018 when American funds made several big bets on Chinese technology companies that were preparing to list their shares on the stock market.

Rhodium reported venture capital funding separately from foreign direct investment, which focuses on long-term investments.

Overall, however, US investments into China showed considerable resilience, putting about $14bn into initiatives in the country. This was up from $13bn in 2018 mainly because of big ticket projects such as US carmaker Tesla’s new factory in Shanghai, the expansion of General Motors’ car joint venture, Universal Studios’ moves in entertainment and other initiatives.

In the first quarter of this year, US investments into China held up, the report says, with about $2.3bn in new projects announced, down slightly from a quarterly average of $2.8bn in 2019.

Such resilience was underpinned by a survey conducted by the American Chamber of Commerce in China in April, that found the majority of US companies operating in China did not plan to move production and supply chains out of the country.

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