China is now the world’s “top destination” for foreign direct investment (“FDI”). FDI captures things like foreign companies building infrastructure and making acquisitions of local companies.
The shift came as a result of – wait for it – the Covid-19 pandemic amplifying “an eastward shift in the center of gravity of the global economy”, according to the Wall Street Journal.
New investments by overseas businesses into the U.S. fell 49% in 2020 as a result of the pandemic. China saw its direct investments rise 4% over the same period of time. The success is being attributed to how the country (supposedly) handled the pandemic better than the U.S.
The numbers, heavily influenced by the global pandemic, “underline China’s move toward the center of a global economy long dominated by the U.S.,” the WSJ wrote.
Foreign investments into the U.S. peaked at $472 billion in 2016, while at the same time foreign investments in China totaled $134 billion. Since then, investments in China have continued to rise, and investments in the U.S. have continued to fall. Over the last 4 years, the Trump administration discouraged investment in China and put Chinese investors on notice that investing in the U.S. would carry new national security scrutiny.
Daniel Rosen, founding partner of Rhodium Group, an independent research firm in New York, said there’s little room for concern: “I don’t think one can say anything confidently about the impact of the FDI downturn in the U.S., compared to all the other hits on the U.S. economy.”
He continued: “It is natural that foreign investment would decline sharply in the U.S. under the circumstances because it has an open, market economy, while China doesn’t. There is no reason to be concerned about the outlook for the FDI in the United States providing that the U.S. is sticking with its basic open-market competitive system.”
Major names like Honeywell International and Adidas were among companies who invested more in China during the pandemic.
James Zhan, Unctad’s director of investment and enterprise, doesn’t see a respite for the U.S., or other countries that have seen FDI fall, anytime soon. He said: “Investors are likely to remain cautious in committing capital. The road to full FDI recovery will be bumpy.”
Joseph Joyce, professor of international relations and economics at Wellesley College, said: “Companies are reassessing their policies about global supply chains, about foreign markets, about their own use of technology. The pandemic is making all these companies rethink the most basic assumption about where they are located.”
East Asia attracted a third of all foreign investment globally in 2020, the report notes. It marks the largest share since records began in the 1980s. Meanwhile, it isn’t just the U.S. that saw huge drops in the west. The EU also saw a 71% drop in 2020 and the UK and Italy both saw “no new investment”. Germany saw a 61% drop.
While experts thought China could also see such a drop, their economy “reopened in April just as the U.S. and Europe started a series of continuing lockdowns and disruptions.”
Even the Journal notes that it was China’s “ability to quickly control the coronavirus within its borders helped its economy rebound relatively quickly”. China also immediately rushed to shore up confidence from foreign investors at the beginning of 2020. China’s premier, Li Keqiang, told the country’s cabinet in March: “We must implement targeted policies to arrest the slide in foreign trade and foreign investment.”
Other companies have simply found it difficult to leave China. Such was the case for Seoul Semiconductor, whose CEO, Hong Myeong-ki, simply said: “We were very dependent on China.”
Tokyo based researcher Ding Ke noted that this reliance on China’s market for many companies kept them in the country: “They need to reduce over reliance on supply chains in one single market. But the bigger risk they identified is losing the China market.”
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