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Other - MAY 9, 2019

U.S. VC firms continue to pour capital into China

by Andrea Zander

Approximately $18 billion of completed two-way FDI between China and the United States in 2018 represented a 60 percent decline compared to 2017 and a 70 percent decline compared to the record $60 billion seen in 2016, reported the U.S.-China Investment Project. The research initiative is led by Rhodium Group and the National Committee on U.S.-China Relations.

U.S. firms invested more in China last year than Chinese firms did in the United States. There was a more than 80 percent decline in Chinese FDI in the United States to just $5 billion from $29 billion in 2017 and $46 billion in 2016. Accounting for asset divestitures, net 2018 Chinese FDI in the United States was –$8 billion. Meanwhile, American FDI in China dropped only slightly to $13 billion in 2018 from $14 billion in 2017.

Growing U.S. government concerns about technology leakage also weighed on U.S. direct investment to China, especially in the technology space. However, American-based venture capitalists are still pouring money into Chinese start-ups, despite political trade tensions. In 2018, U.S.-owned venture companies invested a record $19 billion in Chinese start-up companies — roughly double the previous record of $9.4 billion in 2017 and five times flows in the other direction.

Barely existent five years ago, Chinese VC investment in the United States has soared since 2014 and continued to flourish in 2018, even while FDI investment slowed sharply. Chinese-owned VC funds participated in more than 270 unique U.S. funding rounds in 2018, contributing an estimated $3.6 billion. Chinese venture investment in the United States has drawn considerable attention, but it plays a much smaller role in the U.S. venture capital ecosystem than U.S. venture capital investment plays in China’s market.

“In China, American investors continued to utilize minority VC investments in 2018 to gain exposure to sectors that are off limits to full-blown foreign takeovers or have powerful informal market entry barriers, for example, digital payments, Internet startups and other digital content,” said the report.

Chinese VC in the United States remained virtually untouched by investment screeners before November 2018. This allowed investment activity to continue in semiconductors and other areas that recorded sharp drops in direct investment in recent years due to stepped-up investment security reviews. However, the U.S.-China Investment Project stated, “Venture capital patterns show that investors have strong appetite to gain exposure to sectors that are restricted or scrutinized for direct investment.”

In real estate, U.S. foreign direct investment in China’s real estate more than doubled to more than $3 billion in 2018. Key deals included Blackstone’s $1.25 billion acquisition of Vivocity Mall and LaSalle’s purchase of Shanghai International Plaza. But Chinese outbound FDI decreased dramatically in some sectors like real estate and hospitality that were blacklisted by Beijing and even turned neg­ative when accounting for divestitures.

U.S. national security reviews weighed on activity in other sectors including informa­tion and communications technology (ICT) and infrastructure. Less impacted by these policy pressures, health and biotech became the top sector for Chinese FDI in the United States in 2018.

And China’s domestic crackdown on leveraged out­bound investors has dramatically changed the landscape of activity in the United States. Several compa­nies that led the Chinese FDI boom in the United States since 2014 — including HNA, Anbang and Wanda — have not just stopped new investments but were forced to divest most of their previously acquired assets.

The political outlook remains fragile, and new pol­icies could further depress commercial appetite for greater FDI and portfolio flows. U.S. President Donald Trump recently announced via Twitter a tariff hike on Chinese goods. With the new hike, “FDI numbers won’t turn around, and it will accelerate businesses to move away from China,” reported South China Morning Post.

 

 

 

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