Chinese Are Restricting Global Investment. What Does it Mean to Africa?

Feature Article Chinese Are Restricting Global Investment. What Does it Mean to Africa?
JUL 22, 2019 LISTEN

The Chinese Government has put a stop to their finances to their foreign investments around the world, including the United States, mainly due to a new government policy that halts or restricts flow of Chinese investment money into the nations of the world. The United States is worst hit. What is at stake for the ongoing Chinese investment in Africa and future cooperations?

The decline of Chinese direct foreign investment and flow of investment money from China to the world are not essentially Donald Trump’s trade war with China. Neither is the decline affecting only good and services affected by customs tax increases. Almost all Chinese foreign trade and investment are affected.

United States are making it worse for Chinese to trust the United States or for Chinese businesses to trade or provide their services, in some cases, the United States are taking the Chinese business that can control U.S. data, such as national health insurance and other utilities, away from them.

The New York Times carried a story on July 22, 2019, headed, Chinese Money in the U.S. Dries Up as Trade War Drags On. The news put the fall to nearly 90 percent since Donald Trump started the trade war with China. But the reason goes beyond Trump’s trade war. And the policy to restrict foreign direct investment does not affect United States alone.

Though the growing distrust between the United States and China has slowed the once steady flow of Chinese cash into America, with Chinese investment plummeting by nearly 90 percent since President Trump took office, the effect of Chinese overall restriction on global investment affect all the nations China has investments.

The falloff in United States, which is being felt broadly across the U.S. economy, stems from tougher regulatory scrutiny by the United States authorities and a less hospitable climate toward Chinese investment, but mainly as Beijing is now tightening the limits on foreign spending.

It is affecting a range of industries in the United States, including Silicon Valley start-ups, the Manhattan real estate market and state governments that spent years wooing Chinese investment, underscoring how the world’s two largest economies are beginning to decouple after years of increasing integration.

“The fact that the foreign direct investment has fallen so sharply is symbolic of how badly the economic relationship between the United States and China has deteriorated,” said Eswar Prasad, former head of the International Monetary Fund’s China division. “The U.S. doesn’t trust the Chinese, and China doesn’t trust the U.S.”

For years, Chinese investment into the United States had been accelerating, with money pouring into autos, tech, energy and agriculture and fueling new jobs in Michigan, South Carolina, Missouri, Texas and other states. As China’s economy boomed, state and local governments along with American companies looked to snap up some of those Chinese funds.

But Mr. Trump’s economic Cold War has helped reverse that trend. Chinese foreign direct investment in the United States fell to $5.4 billion in 2018 from a peak of $46.5 billion in 2016, a drop of 88 percent, according to data from Rhodium Group, an economic research firm. Preliminary figures through April of this year, which account for investments by mainland Chinese companies, suggested only a modest uptick from last year, with transactions valued at $2.8 billion.

“I certainly hear in conversations with investors a lot of concern about whether the U.S. market is still open,” said Rod Hunter, a lawyer at Baker McKenzie who specializes in foreign investment reviews. “You have a potentially chilling effect for Chinese investors.”

A confluence of forces appear to be at play. A slowing economy and stricter capital controls in China have made it more difficult for Chinese investors to buy American, according to trade and mergers and acquisitions advisers. Mr. Trump’s penchant for imposing punishing tariffs on Chinese goods and an increasingly powerful regulatory group that is heavily scrutinizing foreign investment, particularly involving Chinese investors, have also scared businesses in both countries.

China, which has retaliated against American goods with its own tariffs, may also be turning off the investment spigot as punishment for Mr. Trump’s economic crackdown.

Concerns about America’s receptiveness to Chinese investment have been aggravated by a flurry of transactions that collapsed under heavy scrutiny from the Committee on Foreign Investment in the United States. The group, which is headed by the Treasury Department, gained expanded powers in 2018 that allow it to block a broader array of transactions, including minority stakes and investments in sensitive technologies like telecommunications and computing.

Shortly after the New Year, China’s HNA Group took a $41 million loss on a glass and aluminum Manhattan high rise after American regulators forced it to sell the property because of security concerns about its proximity to Trump Tower, only a few blocks away.

The investment chill could hurt the American real estate market particularly hard. A May report noted a “frenzy of disposal activity” among Chinese commercial real estate investors in the United States. (Credit Tony Cenicola/The New York Times)

The investment chill could hurt the American real estate market particularly hard. A May report noted a “frenzy of disposal activity” among Chinese commercial real estate investors in the United States.

In March, the Chinese owners of a gay dating app known as Grindr were told by regulators to find a buyer for the company. The Trump administration feared Beijing could use personal information as leverage over American officials.

Those interventions followed prominent cases earlier in Mr. Trump’s term, such as Broadcom’s quashed bid for Qualcomm and the sale of MoneyGram to a unit of the Chinese e-commerce giant Alibaba last year. An agreement involving Lattice Semiconductor and an investment firm with reported ties to the Chinese government was also rejected.

In some cases, the chill has benefited American companies. In June, UnitedHealth bought PatientsLikeMe, a health care technology start-up, after the committee said it was a security risk to allow the company’s Chinese owner to have access to health data. The purchase amount was not disclosed.

But the increased scrutiny is also complicating efforts by American industries to team up with Chinese investors and leading to a retrenchment in certain sectors. The real estate sector, which has been buttressed by investors from China in the last decade, has had a steep falloff as relations sour and as Chinese officials clamp down on foreign real estate investment.

A May report from Cushman & Wakefield noted a “frenzy of disposal activity” among Chinese commercial real estate investors in the United States. In 2018, there were 37 property acquisitions by Chinese buyers worth $2.3 billion, but $3.1 billion of commercial real estate was sold off. The report said that the treatment of HNA and tough trade talk made Chinese investors feel unwelcome.

Chinese investors are also showing less appetite for residential real estate in the United States. Research released recently by the National Association of Realtors found that purchases of homes in America by Chinese buyers declined by 56 percent to $13.4 billion in the year to March.

“The magnitude of the decline is quite striking, implying less confidence in owning a property in the U.S.,” said Lawrence Yun, chief economist at the realtor’s group. Despite the decline, China was still the top foreign buyer of American properties from April 2018 to March 2019.

Most of Chinese real estate investments are shifted to Europe, mostly to Germany. The government of Southern Germany state of Bavaria was alarmed at the rate Chinese are buying buildings in Munich and the surrounding regions. In the Abendzeitung (AZ), which is translated Evening Newspaper, a munich-based dailies, reported in one’s of its June 2019 edition that the Bavarian administration was taken steps to regulate such buyings.

The global financial sector, including banks and private equity, is also feeling the effects. A fund that Goldman Sachs started with the China Investment Corporation in 2017 is being looked at closely by the Treasury Department, according to two Treasury officials. The fund, the China-US Industrial Cooperation Partnership, was set up to invest in American manufacturing and health care companies and then forge business ties in China.

A Goldman Sachs spokeswoman said that the bank was in compliance with all government regulations.

John Kabealo, a Washington-based lawyer who specializes in cross-border transactions, said that American private equity funds are now less likely to team up with foreign funds when making acquisitions because doing so could raise red flags.

“I think there’s a whole lot of concern in the fund world right now,” Mr. Kabealo said. “Funds still want to take Chinese money, but they’re being much more cautious in the way that they do it.”

Even if the two countries reach a trade deal, tepid Chinese investment is expected to continue. The administration is rolling out new barriers to investment, including controls on the types of American technology that can be sold overseas and placing Chinese firms like Huawei on a government blacklist.

The Committee on Foreign Investment in the United States, which previously only had the authority to review transactions in which a foreign investor took a controlling stake of an American business, is now reviewing a broader range of transactions, including joint ventures and smaller investments by foreigners in American businesses that make critical technology.

“There’s certainly a degree of hesitation in China in investing in the U.S.,” said Aimen Mir, the former assistant secretary for investment security at the Treasury Department who recently joined the law firm Freshfields Bruckhaus Deringer. “It’s hard to argue against the fact that these rules have clearly had some impact on Chinese investment.”

Weaker Chinese investment is unlikely to derail the United States economy, as it is a small fraction of that from Britain, Canada, Japan and Germany. China also continues to be largest buyer of United States Treasuries; however, its holdings have fallen in recent years to $1.1 trillion, according to the latest Treasury Department data.

But the decline in investment could hurt areas that are already economically disadvantaged and that have become dependent on Chinese cash. States like Michigan have increasingly wooed Chinese investment, resulting in new factories and jobs in a part of the country that has struggled to recover from the Great Recession.

Craig Allen, the president of the U.S.-China Business Council, said the loss of Chinese investment would be felt predominantly in rural states where Chinese investors have bought factories and revived struggling businesses.

“The not-so-welcome mat is out, and it is having a deleterious effect on relatively poorer areas in the United States that need jobs,” he said.

“The Chinese hear from our state and local officials that they’re welcome,” Mr. Allen said. “What they’re hearing from federal officials is quite different.”

In Kentucky’s Ballard County, local officials are grateful that China’s Shanying International Holdings acquired a closed paper mill last year. In May, the mill reopened and filled many of the 300 jobs that had been lost.

Mayor Brandi Harless of Paducah, Ky., who traveled to China to meet executives of the company this year, said that it would be a shame if trade tensions hampered manufacturing investments in towns such as hers.

“Given our national conversation, I expected there to be some hesitancy,” Ms. Harless said. “But I haven’t heard anyone in our community be negative about this opportunity.”

In Africa, the decline of foreign direct investment or restriction of money flow from China into the continent has nothing to do with Trump’s trade war with China or restrictions of Chinese investments and businesses by the current U.S. administration. The story with fallout of Chinese investments in Africa has to do with a new Chinese policy on direct foreign investments.

Boomerang reported on July 19, 2019 that Beijing is withholding $4.9 billion needed to finish Kenyan Railway project, once a flagship for Xi Jinping’s Belt and Road initiative.

Gleaming concrete sleepers were seen running across a new railway bridge in Kenya, the latest stretch of a Chinese-built line from the coast all the way to Uganda. Only, it doesn’t quite reach the border. Instead, the railroad ends abruptly by a sleepy village about 75 miles west of the Kenyan capital, Nairobi, the tracks laid but unused.

When Chinese investment concerning railway is mentioned, Ghanaians should be concerned. The government of Ghana has a number of Chinese investments in the railway and road sector. How has the new Chinese investment policy affected Ghana?

Construction of what was intended to be a flagship infrastructure project for Eastern Africa was halted earlier this year after China withheld some $4.9 billion in funding needed to allow the line’s completion. Beijing’s sudden financial reticence appeared to catch the governments of Kenya and Uganda off guard: Both may now be forced to reinstate a colonial-era line in a bid to patch the link and boost regional trade.

The reason for China’s attack of cold feet may lie in the project’s high profile. Chinese state media repeatedly used the Mombasa-Nairobi Standard Gauge Railway (SGR) project as a showcase for President Xi Jinping’s Belt and Road Initiative. But with concerns rising globally that Belt and Road was loading poorer nations with unsustainable debt, Xi signaled in April that Beijing would exert more control over projects and tighten oversight.

Beijing’s tighter scrutiny of Belt and Road projects comes as China shifts the program away from low-cost loans onto a more commercial basis involving its private sector. Clearer rules for state-owned enterprises and building overseas auditing and anti-corruption mechanisms were among other steps floated by officials at the time of the Belt and Road Forum in April.

China supports the Kenya railway project but requires a reasonable and sustainable financing plan, according to a person involved with the project. Because China now requires high-quality projects and a more thorough feasibility study, the process of approving loans has slowed in general, but it doesn’t mean the project is terminated, said the person, who asked not to be named as they are not authorized to speak publicly.

Related parties in the Chinese government and banks are still deliberating financing options, the person said. China’s Ambassador to Kenya, Wu Peng, was asked in May by local newspaper the Daily Nation about expectations President Kenyatta’s visit to China that month would secure funding for the missing section of the railway, to Kisumu by Lake Victoria.

“I really don’t know where those expectations came from,” Wu was cited as saying.

If the Chinese Ambassador to Kenya, Wu Peng cannot tell where the expectations or prospects for the continuation of Kenya Chinese Rail Project would come from, then who can tell? And how many of such Chinese foreign direct investments in Africa are affected?

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