A mutually beneficial bilateral relationship
US companies in China have shifted their investment priorities and are now focusing on producing consumer-oriented goods instead of attempting to keep their manufacturing costs down, according to the latest report by the Rhodium Group and the National Committee on USChina Relations.
The report also found that Chinese companies have been making more direct investments into strategic assets in technology, brands and talents.
According to the Two-Way Street report, American companies have been active in the Chinese economy since after the 1979 reforms, having invested hundreds of billions of dollars.
Chinese investors have in the past decade been expanding their US presence as well, turning the foreign direct investment (FDI) relationship into a two-way street with billions of dollars flowing in either direction every year.
This two-way flow has important economic and political implications, and has turned FDI into a first-order priority in the bilateral relationship, said Daniel H. Rosen, a founding partner of Rhodium Group who leads the firm’s work in China.
“The change has expanded in recent years to include pursuit of financial returns and realization that manufacturers need to be closer to American consumers to defend market share in times of rising labor costs in China,” said Rosen.
The report makes use of a new transactions-based proprietary database to create a fully comparable picture of American FDI in China and vice versa from 1990 to 2015. It found that the depth of FDI integration is greater than commonly thought and annual patterns are rapidly evolving.
The report added that American firms have been leaders in overseas investment in Asia for the past century and a half, and China has been an important part of that story.
Since the 1970s, US multinationals have been 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.
Official US estimates for the stock of Chinese FDI range from $15 billion to $21 billion. Official Chinese numbers put the figure at $41 billion, more than twice the US estimates. Rhodium Group has maintained a transactional dataset on Chinese FDI in the US since 2011.
For the entire period of 1990 to 2015, the report counts more than 1,200 individual transactions with a combined value of $64 billion.
“We count nearly 6,700 American investments in China with a combined value of $228 billion. Our dataset includes more than 1,300 US companies that have built significant operations in China, 430 of them investing more than $50 million and 56 with billion-dollar bets,” said Thilo Hanemann, a director and economist at Rhodium Group.
“The structure of China’s economy is evolving quickly, far faster than other major economies have in the past, and the nature of outbound Chinese FDI is changing quickly as a result, reflecting new motives, interests and aspirations.”
A comparison of the aggregate cumulative transaction values shows that the American FDI footprint in China is still about four times larger than Chinese FDI presence in the US. For annual flows, however, the tide has turned in recent years and Chinese FDI to the US has outweighed American FDI in China since 2015.
“FDI was key to China’s past economic success and was central to the global model that many US businesses embraced, generating benefits for Chinese and US consumers,” said Steve Orlins, president of the National Committee on US-China Relations.
The FDI projects going on in both countries also create job opportunities — US companies were found to be employing more than 1.6 million workers in China.
At an earlier stage, the benefits of Chinese presence in the US are showing up too, attracting much needed capital to the US while permitting Chinese companies to tap into US advantages and create more than 100,000 jobs.
“These links also facilitate peopleto-people relationships to a greater extent than trade and tourism. The benefits today are spread across more than 90 percent of US states and Chinese provinces,” said Rosen.