Chinese Direct Investment in California: 2017 Update

In 2016, Chinese investment into the United States superseded U.S. investment into China for the first time — a remarkable transition that has implications for both countries far beyond simple economics. With the exception of 2005, an anomalous year when Lenovo acquired IBM’s PC division, Chinese investment in the US economy was negligible until 2010, when it skyrocketed to $5 billion. By 2016, annual flows reached more than $46 billion.

California became the number one recipient of Chinese FDI in recent years, with more than $16 billion in 2016 alone. Much of the investment has gone into two important areas – real estate and technology. While the motivations for these investments have been somewhat different, both have already had an identifiable impact, one that will almost assuredly grow in the next few years.

First identified in the Asia Society – Rhodium Group study An American Open Door? Maximizing the Investments of Chinese Direct Foreign Investment in 2011, the Asia Society has worked on a wide range of research papers covering Chinese investment: in 2012 on Chinese Direct Investment in California with Rhodium Group; in 2014, HIGH-TECH: The Next Wave of Chinese Investment in America, also with Rhodium Group; and in 2015 with Breaking Ground: Chinese Investment in U.S. Real Estate with Rosen Consulting Group. Each of these data-driven reports has created awareness – in China as well as the US – of the scope and scale of growing Chinese investment into the US economy.

On the positive side of the ledger, Chinese investment has in many ways proven to be an enormous opportunity for both countries, providing Chinese investors the opportunity to diversify their portfolios, build value, create market awareness, and – in the case of the tech industry – support Chinese domestic R&D efforts. For the US, Chinese investment has provided capital for business and industry and contributed much needed investment in local infrastructure and jobs for communities across
the US.

At the same time, investment from China has also provoked less positive reactions in the United States, with concerns over the acquisition of sensitive technologies by Chinese companies – and the likely enhancement of the Committee on Foreign Investment in the U.S.’ (CFIUS) mandate to scrutinize acquisitions deemed not to be in the interest of American security. There are also concerns that Chinese real estate acquisition drives the cost of affordable housing ever higher, thereby actually increasing the pressure on local communities.

This report, drafted by Thilo Hanemann of the Rhodium Group, brings many of these previous intellectual currents together into a new study with an emphasis on innovation, one that demonstrates just how profoundly Chinese investment is shaping the economic, financial and – to some degree – the social climate in the US. This project was developed from the ground up in conjunction with our partners at the Bay Area Council, the largest public advocacy business organization in Northern California. This report complements the Bay Area Council white paper Chinese Innovation: China’s Technology Future and What it Means for Silicon Valley, authored by Sean Randolph. Taken together, the two reports provide a strong foundation for understanding the opportunities – and challenges – inherent in the ever deepening financial relationship between the world’s two largest economies.

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