This excerpt is from a larger report by the Rhodium Group and the National Committee on U.S.-China Relations, with support from AmCham Shanghai and the Chinese General Chamber of Commerce-USA. The full report is available for download at www.rhg.com and an interactive website is available at www.us-china-fdi.com.
American companies have been active in the Chinese economy throughout the post-1979 reform period, investing hundreds of billions of dollars. In the past decade, Chinese investors have begun to expand their U.S. presence as well, turning the FDI relationship into a two-way street with multi-billion dollar flows every year. This change has important economic and political implications, and has turned FDI into a first-order priority in the bilateral relationship.
It is essential that our discourse about FDI — to the greatest extent possible — be data-driven. However, current FDI statistics of both the U.S. and Chinese governments are compiled with the primary goal of analyzing balance of payments-related questions; they are subject to significant distortions due to tax optimization and other shorter-term considerations; they have long delays and many gaps; and they do not offer the granularity necessary to analyze many policy-relevant questions. This study sets out to create greater transparency on U.S.-China direct investment flows to facilitate a fact-based and more productive policy debate.
U.S. FDI in China
Since the 1970s, U.S. multinationals were key proponents of normalizing the relationship with China, and their operations in China have been central to ties between the two countries. Over the past quarter century these firms have transferred technology, created jobs and helped reshape the Chinese economy.
The most commonly used official estimates of the U.S. FDI stock in China suggest a modest value, reflecting the methodological shortcomings of balance of payments statistics. The U.S. Bureau of Economic Analysis puts the stock of American FDI in China at US$75 billion as of 2015. China’s Ministry of Commerce counts $70 billion of cumulative utilized FDI from the U.S. to that date. Both datasets have limited utility for analyzing two-way FDI flows. We offer an alternative perspective on the scope and patterns of U.S. FDI in China, by introducing a new transactions-based dataset created by identifying, qualifying and counting every single FDI transaction over $1 million since 1990. We count nearly 6,700 American investments in China with a combined value of $228 billion. Our dataset includes more than 1,300 U.S. companies that have built significant operations in China, 430 of them investing more than $50 million and 56 with billion-dollar bets.
We also provide details on a variety of other policy-relevant metrics not available in official statistics. For instance, we can discern that more than 71% of total U.S. FDI by value went into greenfield projects, the majority of them small- and medium-sized. We describe investment patterns across industries over time, illustrating how the focus has shifted from exploiting comparative advantage in light manufacturing to serving local consumers and customers. Finally, our data indicates that American investment in China peaked in 2008 and has been largely flat since, with a declining trend since 2012.
Chinese FDI in the U.S.
Official statistics are similarly problematic for describing the scale and patterns of Chinese FDI in the U.S. Official U.S. estimates for the stock of Chinese FDI range from US$15 billion to $21 billion. Official Chinese numbers put the figure at $41 billion, more than twice the U.S. estimates. Rhodium Group has maintained a transactional dataset on Chinese FDI in the U.S. since 2011. For this study, we have updated this catalogue to include investments back to 1990, to provide a fully comparable count of Chinese FDI in the U.S. for the past 25 years. For the entire period of 1990 to 2015, we count more than 1,200 individual transactions with a combined value of $64 billion.
Our transactions data also clarifies details on the structure and patterns of this Chinese investment. We show that Chinese market entry in the U.S. was dominated by acquisitions rather than greenfield FDI, and that Chinese companies have expanded their presence from urban coastal economies to a great number of U.S. states. Another important finding is that Chinese investment in the U.S. is now increasingly driven by private sector activity (an average of 77% in the past three years), and that the investor mix has lately evolved from large multinational corporations to include private equity firms, venture capitalists and other financial investors.
We have demonstrated that the commercial stakes on both sides are two to four times higher than commonly used statistics suggest. Our data show that while some Americans are eager to talk about imposing reciprocity requirements for inward Chinese FDI, the cumulative value of U.S. FDI transactions permitted in China to date is four times than that of China in the U.S. Similarly, while many Chinese complain about the lack of American openness, our data show that the U.S. is open and welcoming to Chinese investment, and that Chinese companies are now investing more in the U.S. annually than American companies in China. These observations emphasize that both sides need to reconsider the data before staking out new policy positions.