In a noteworthy reordering of the relative statuses of the world’s two largest economies, U.S. investment inflows shrank notably last year while China’s inched upward. That made China the world’s leading destination for foreign direct investment .
While China’s share grew modestly last year, reaching $163 million, the amount moving into the United States fell by nearly half, from $251 billion in 2019 to $134 billion last year.
China, despite being the country where the novel coronavirus was first identified late in 2019 , defied the dour economic trends that plagued the world in 2020. It rapidly recovered from the coronavirus epidemic, restarted manufacturing and became the only major economy to expand, at 2.3%. Furthermore, its increase in inflows of foreign direct investment, or FDI, also defied global trends, with worldwide FDI collapsing by 42% to roughly $860 billion, from $1.5 trillion in 2019, according to a United Nations report .
Despite China’s newfound lead in FDI, the U.S. still ranks No. 1 in total foreign investment.
China’s catching up with the U.S. in FDI predates the pandemic, which crippled the American economy while China, which had suffered its first-ever GDP contraction in the first quarter , recovered and then thrived in the fourth quarter . U.S. inflows peaked in 2016 at $472 billion, when China saw a mere $134 billion.
“[China’s FDI] growth is favored by liberalization plans, the rapid development of the high-tech sector and the establishment of free-trade zones,” the European financial-services group Nordea said in a recent note based on U.N. data.
Indeed, high-performing areas included the high-tech sector’s growth of 28.5% in 2020 and the service sector’s 13.9% growth.
There was also divergence among regions in 2020. Broader Asia saw an FDI drop of only 4%, faring much better than Latin America and Africa. Developed countries suffered heavily, with a 69% drop in inflows, with by far the worst decline — 100% — seen in the U.K., due largely to its being hammered by the coronavirus pandemic.
Foreign direct investment captures things like foreign companies’ building new factories or expanding existing operations in a country or their acquisitions of local companies.
Despite the U.S.-China trade war and other frictions, American companies are still keen to invest in and acquire Chinese firms. JPMorgan Chase (NYS:JPM) and Goldman Sachs (NYS:GS) recently bought full ownership of their Chinese partners. U.S. conglomerate Honeywell International Inc. (NYS:HON) and Germany’s Adidas AG (OTC:ADDYY) (ETR:XE:ADS) both significantly increased their presence in China last year.
China, according to the World Bank’s 2020 Doing Business report , has upgraded its business environment. It leaped from 46th out of 190 countries ranked by that report in 2019 to 31st last year.
Opinion (July 2019): The trade war is over — and the winner is China, writes Howard Gold
Chinese investment in the U.S., meanwhile, has cooled after then–President Donald Trump warned Chinese investors that national-security concerns would mean ramped-up scrutiny of potential acquisitions.
Tanner Brown covers China for MarketWatch and Barron’s.