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Two Way Street – US-China Investment Trends – 1H 2020 Update

Fallout from the COVID-19 pandemic and rising political tensions between Washington and Beijing pushed two-way capital flows between the US and China to a 9-year low of $10.9 billion in the first half of 2020

Escalating bilateral frictions and the economic fallout from the COVID-19 pandemic pushed US-China capital flows to their lowest level in almost a decade in the first half of 2020. This report, a joint project of Rhodium Group and the National Committee on U.S.-China Relations,  reviews the latest trends in US-China investment and analyzes the political dynamics and market developments behind them. Our findings are:

Two-way capital flows between the US and China dropped to a nine-year low: Combined direct and venture capital investment between the two countries totaled $10.9 billion in 1H 2020, the lowest level since 2H 2011. The drop would have been even larger if not for one especially large acquisition carried over from last year.

Chinese FDI in the US rebounded slightly due to one deal: The total value of completed Chinese direct investment in the United States increased to $4.7 billion in 1H 2020 from $3.4 billion in 1H 2019, mainly thanks to Tencent’s $3.4 billion purchase of a minority stake in Universal Music Group. The number of completed investment transactions remained low as a wider and more restrictive set of US policies were applied, especially in the technology sector. Aggressive Chinese buying of distressed US assets under the cloud of COVID-19 – a concern voiced by some US politicians at the start of the year – has not materialized.

US FDI in China declined as the dual impact of the pandemic and bilateral tensions hit: US companies slashed new investment in China in 1H 2020 but remained committed to ongoing greenfield projects and previously announced acquisitions. Completed investments declined to $4.1 billion, a year-over-year drop of 31%. So far, China’s response to more aggressive US policies has been restrained, but US investors could face a backlash if relations continue to sour.

Chinese venture activity in the US remained stable but total investment dropped to a six-year low: While preliminary figures show a modest uptick in the number of Chinese VC transactions in the US in 1H 2020 compared to 2H 2019, the estimated investment volume of $800 million was the lowest since 2014. The health and biopharma sector accounted for about 50% of the total transaction volume and five of the ten largest transactions in 1H 2020.

US venture investment in China hit its lowest level in four years amidst a broader tech slowdown: VC investment by US firms in China notched a fourth consecutive six-month period of decline as the COVID-19 pandemic further deepened the correction in Chinese technology sector investment since 2018. We estimate US investors participated in 120 transactions and invested only $1.3 billion in Chinese startups in 1H 2020 with a notable drop in contributions to early-stage fundraising rounds.

Growing bilateral tensions are pressuring firms to unravel existing investments: The order by President Trump for Bytedance to sell social media app TikTok is the latest example of a series of high-profile asset divestitures forced by US regulators. At a time of rising discomfort with US-China technology integration, numerous other companies – both Chinese firms operating in the US and US firms with a presence in China – could face pressure to divest.

Flows are unlikely to recover in 2H amidst persisting systemic concerns and US election politics: The political environment, stepped-up enforcement of FIRRMA rules and a meager deal pipeline will keep investment subdued in 2H 2020. The electoral outcome may prevent decoupling overreach and make a recovery in plain-vanilla flows in non-strategic sectors possible again but the systematic concerns driving caution on Chinese investment in high technology, critical infrastructure and personal data assets will not subside. China’s new “internal circulation” campaign suggests that Beijing reads the writing on the wall to mean less two-way engagement with the world, especially the US, in the years ahead.

Click here for the full Two-Way Street report