2016 is likely to be another record year for Chinese foreign direct investment (FDI) in the U.S., although the American political climate could affect the inflow, according to a new report.
China's FDI in the U.S. grew to more than $15 billion in 2015, setting a new record, with over $30 billion already in pending deals and projects in the first quarter of 2016.
New Neighbors: 2016 Update was released on Tuesday by the National Committee on U.S.-China Relations and the Rhodium Group, an economic research firm. It is a follow-up to a 2015 study on Chinese FDI that includes a breakdown of Chinese investment in U.S. congressional districts.
The 2015 FDI total exceeded the $12 billion in 2014 by nearly 30 percent, and 2015 was the second consecutive year that mergers and acquisitions by Chinese investors topped more than 100 deals, totaling $13.5 billion, according to the report.
"2016 will by all means be a new record year for Chinese investment in the U.S. barring any major disruptions," said Thilo Hanneman, co-author of the report, at Covington & Burling LLP in Washington, where the report was released.
The number of Chinese-affiliated companies in the U.S. exceeded 1,900 at the end of 2015, extending across more than 80 percent of congressional districts.
New York was the leading state for Chinese investment in 2015. As greenfield (new venture) foreign direct investment (FDI) picked up and many existing companies expanded employment, the number of Americans employed by Chinese-affiliated companies rose by 12 percent to 90,000 at the end of last year.
"Broken down by industry, the most important trends are that Chinese companies are building energy-intensive or energy dependent factories in the U.S.. They've started to discover a competitive advantage in the U.S. including cheap energy," said Hanneman.
Michael DeFranco, chairman of the Baker & McKenzie LLP law firm's global M&A practice, is confident China can maintain the current pace of FDI.
"Chinese companies are acting with confidence and continuing to make major moves in Europe and North America. We see no let up in that interest – far from it – we expect Chinese investment into Europe and North America to hit further record highs in 2016," he said.
David Fagan, a partner at Covington and Burling LLP, where he co-chairs the firm's top ranked practice on cross-border investment and national security matters, said at the Washington event that the economies of China and the United States are truly intertwined.
"In turn, the economic relationship that can be forged through investment is not just something that is economically beneficial. The relationships that can develop through this type of investment can help balance some of the political differences between the two countries," Fagan said.
The regulatory and political environment in the U.S. is an important consideration when projecting future Chinese investment, the report said.
It says that the Committee on Foreign Investment in the United States (CFIUS), which reviews foreign acquisitions for national security risks, "generally manages to screen for legitimate concerns without closing the door on benign Chinese deal-making''.
On debate in the U.S. about Chinese FDI, the report says: "It is essential that the debate in the U.S. is objective, grounded in fact, and awake to both the potential risks and potential benefits from Chinese investment.
"The presidential election cycle elevates the risk that this debate may take the opposite turn in 2016. The first months of the year have produced numerous instances of politicians from both parties chasing votes and media attention by issuing dire but ill-founded warnings about Chinese investments, and introducing bills that propose severely clamping down on traditional U.S. openness to FDI.''
Sophie Meunier, research scholar at the Woodrow Wilson School of Public and International Affairs at Princeton University, said the political discourse over Chinese investment in the U.S. has split in two.
"A positive narrative has emerged at the local level, with mayors, congressmen and governors trying to attract FDI from China in order to preserve and create jobs," she said.
"A negative narrative of Chinese investment has emerged at the national level, however, with simplistic political posturing about the dangers of China taking over the American economy and society through foreign investment," Meunier wrote in an e-mail.
She said that research indicates that the backlash against Chinese investment almost always comes from a different political district than the one in which the investment is located.
Edward Alden, the Bernard L. Schwartz Senior Fellow at the Council on Foreign Relations, said there has been election-year rhetoric in the past about the supposed ills of foreign investors.
"The Japanese purchases of Rockefeller Center in New York and the Pebble Beach golf course became an election-year issue in 1992, stoking fears that Japan was buying up prized American assets. But that story ended with Japanese companies taking heavy losses and selling these and other assets back to Americans at a deep discount. Despite some of the criticisms of Chinese economic policy in this year's campaign, I think that lesson has been learned," Alden wrote.
