US trade war forces businesses to rethink Chinese investments amid fears dispute will drag on into new year
- Foreign direct investment inflows to China drop in first 11 months of year as concerns grow there will not be a swift resolution to the tensions
- One survey found that around a third of companies were considering delaying or cancelling investments
The US trade war has prompted some overseas companies to rethink whether they should invest in new plants and equipment in China, despite the temporary pause in hostilities.
Foreign direct investment inflows into China fell in the first 11 months of this year, according to the latest government data, and concerns are mounting among corporate leaders and investors about how long trade tensions between the world’s two biggest economies will last.
Economists are predicting that China’s gross domestic product growth could slip below 6 per cent next year if the trade dispute escalates further and continues to filter down to the private sector. Beijing has a 6.5 per cent GDP growth target for this year.
“We’re hearing that a lot of investors are just keeping their powder dry,” said William Zarit, the chairman of the American Chamber of Commerce in China.
“They’re waiting to see what happens.”
A recent survey by AmCham China and its sister organisation AmCham Shanghai found that 31.1 per cent of businesses who responded were already considering delaying or cancelling investments in China as a result of the ongoing trade tensions.
The survey interviewed more than 430 companies between August 29 and September 5, ahead of the imposition of the latest round of tariffs by the US on September 24.
This year, the US has placed tariffs on almost half of all goods that are exported from China to the US, with a total value of around US$250 billion.
US President Donald Trump has previously threatened to slap new levies on nearly all Chinese-made products, and his sanctions have triggered similar retaliatory measures from Beijing.
Trump, a self-described “Tariff Man”, is trying to overcome a trade deficit between the two nations that topped US$376 billion in 2017 and has widened further this year.
The Trump administration also has accused China of engaging in unfair trade practices, including the forced sharing of technology.
Following a steak dinner at the G20 leaders’ summit in Buenos Aires this month, Trump and his Chinese counterpart, Xi Jinping, agreed to a 90-day truce to negotiate further. The US effort is being led by Robert Lighthizer, the US trade representative and a long-time China sceptic.
Bloomberg News, citing people familiar with the matter, reported on Thursday that the two sides will meet in Beijing in January to resume discussions.
After months of attacking Beijing and its policies on Twitter, Trump himself has generally toned down his rhetoric about China since the meeting with Xi, saying this month that a deal could happen “rather soon” and the “talks are going very well”.
In that vein, Beijing has pledged to lower import taxes on some items as part of efforts to open up its economy and to buy more agricultural products from the US.
The Chinese government also unveiled draft foreign investment legislation last week that would prohibit forced technology transfers through administrative measures, but critics doubt it will change long-standing practices in China without proper enforcement.
Despite those positive steps, the US has made it clear that it plans to raise tariffs from 10 per cent to 25 per cent on some US$200 billion of Chinese imports if a deal cannot be reached.
For the moment, investors and multinational corporations remain cautious as a failure to reach an agreement could drive the two superpowers deeper into a trade war that could weigh on economic growth globally next year.
UBS said last month that Chinese GDP growth could slip a full percentage point to 5.5 per cent next year if the trade war escalates further. That would mark the lowest growth rate since 1990.
In a recent survey of clients with operations in Asia, Citigroup found that about half said their supply chains had already been disrupted by the trade war. The survey of 64 of the bank’s largest trade clients was conducted in October.
More than 72 per cent said they were planning to take steps to reduce the effects of the trade tensions, ranging from relocating their manufacturing operations to passing on costs to their customers, according to Citi. Most of those surveyed said they expected the trade tensions to last a year or longer.
“From the corporate side, especially for those that are making investments in China, I think only recently they have started to realise that this could be a significant risk,” said Joy Yang, the chief Asia economist for the hedge fund Point72 Asset Management.
“Some of them are still waiting for more clarity, but some of them are already actively planning to change their operations base to other countries because they think [the trade conflict] is going to be long term and it will be very hard to go back to where the US-China relations used to be,” she said.
Investors also are looking for more assurance from the Chinese government that privately owned and foreign companies will be on a more even playing field with state-owned enterprises in China.
The escalating trade tensions come as China is trying to modernise its industrial base and encourage overseas investors to pump more money into its economy.
Foreign direct investment inflows into China have grown dramatically since the turn of the century, more than tripling between 2000 and 2017.
Overseas investors pumped US$136.3 billion into China last year, putting it second worldwide behind the US in terms of investment inflows, according to the United Nations Conference on Trade and Development. That compared with US$40.7 billion in 2000.
But, the trade tensions this year have begun to weigh on foreign investment.
Foreign direct investment plunged 27.6 per cent year-on-year in November, which Chinese officials attributed to a “high base of comparison” in the prior year, according to the Ministry of Commerce.
Through the end of November, foreign investments are down 1.2 per cent to 793.7 billion yuan (US$115.2 billion), according to the ministry.
The impact of foreign investments on the overall Chinese economy no longer plays the “big outsized role” it did as recently as a decade ago, said Frederic Neumann, co-head of Asian economic research at HSBC. But, inflows are not likely to dry up because the rapid growth of China’s economy has made it “one of the most promising consumer markets in the world”, he said.
“China is too big to ignore. There may be some concern over supply chains and the diversification of these supply chains,” Neumann said. “I think there is still a compelling argument for many multinationals to invest in China given the size of its market.”
Companies have been increasingly looking to Southeast Asia as an area for investment in recent years, with the trade tensions causing some companies to accelerate plans to shift investments away from mainland China.
In hopes of further boosting inflows of foreign money into the economy, the Chinese government has begun easing restrictions on deals with overseas investors in a number of sectors.
The US has been pushing China to open up of its markets, from the automotive industry to the financial sector, to increase investment.
For example, China said last year that it would allow foreign financial firms to own controlling stakes in joint ventures in some mainland sectors, including financials and automobiles.
Several banks have since increased or are looking to up their stakes to 51 per cent, while German carmaker BMW recently agreed to increase its stake in its joint venture to 75 per cent.
Zhengyuan Bo, co-founder and senior analyst at GRisk, a political risk analytics firm in Shanghai, said that he believed China has created a more open environment for foreign investors than the US has recently.
“The past year and in 2018 has been a plus for investment in China,” he said. “I think that opening up to the world will continue.”
But, that does not necessarily mean companies are willing to move forward until they have greater clarity on the US-China trade environment, which may not happen in a quick manner, Kelvin Lau, Standard Chartered’s senior economist for Greater China, said.
“Policy wise it’s positive,” Lau said. “Because of the uncertainty on the outlook for now, I would believe – I do not have any concrete evidence – that very few foreign investors at this time would take advantage such policy relaxation or opening up just because they can’t see too far ahead into the future.”