Foreign Investors Now Prefer China over the US

2020 was a disastrous year. We know about the coronavirus. However, the virus has both direct (health) and indirect (economic, social and psychiatric) effects. [If it’s not obvious, the use of psychiatric rather than psychological is a sarcastic reference to the idiots who invaded the Capital building.]

The newest indirect effect has to do with investment. 2020 was a watershed year. Prior to 2020, investment funds were moving from Europe, the Middle East and Asia to the US. In 2020, investment in the US dropped by half, with the primary beneficiary being China. China took the Number One position from the US as the top destination for foreign direct investment (FDI).

China is tops in receiving new investment money. Total or cumulative investment remains higher in the US, but the new money is going heavily to China. There were big jumps in investments in China by investors in The Netherlands (48%) and United Kingdom (31%).

We don’t have data for US direct investment in China, but that too has been increasing since 2004.(4)

What does FDI matter? Basically, companies need capital for expansion and job creation. Key sources for that are corporate stocks and bonds. The buyers are institutional investors and major private investors — the latter are basically the uber rich, many of whom aren’t Americans. The shifting of money from the US to China means that US companies will pay more for access to capital. It’s old fashioned supply-and-demand. More demand drives higher prices, but so does smaller supply. If you’re old enough, you might remember the OPEC oil embargo of the 1970s, where reduced supply drove prices through the roof. Same thing.

So the redirection of investment funds means more growth and development in China, and less in the US. It may also contribute cost increases in the US at the same time that employment remains flat. Will this trend continue into 2021? Probably, because, thanks to Trump’s bumbling, the coronavirus still isn’t under control in the US.

Sources:

  1. https://www.wsj.com/articles/china-overtakes-u-s-as-worlds-leading-destination-for-foreign-direct-investment-11611511200?mod=latest_headlines
  2. https://www.cnn.com/2021/01/24/investing/us-china-foreign-direct-investment/index.html
  3. https://tradingeconomics.com/china/foreign-direct-investment
  4. https://www.statista.com/statistics/188629/united-states-direct-investments-in-china-since-2000/

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