The quiet retreat of US investment from China

A FEDS Note by Cody Kallen, published by the Federal Reserve Board, sets out what it calls the most comprehensive documentation to date of the fragmentation of direct investment between the US and China. Official bilateral statistics show only a modest decline in US-to-China flows, but they understate American exposure because much of it is routed through Hong Kong and other investment hubs. The note looks through those hubs with project, deal and subsidiary-level data.

Four measures, one direction

Greenfield projects announced by US investors in China held at around 300 a year between 2003 and 2013, declined in the mid-to-late 2010s and dropped sharply in 2020, never recovering; the fall was broad across high tech, advanced manufacturing and other sectors. US acquisitions of Chinese companies, both direct and through non-US affiliates of American parents, fell notably in 2022 and stayed low, a drop the global M&A cycle does not explain.

Existing operations show the same turn. Dividend payouts from US investment in China have overtaken reinvested earnings in recent years, reversing the pattern of 2010 to 2015, while outside China and investment hubs reinvestment has recovered to its norm near 50%. Capital spending rates at Chinese subsidiaries of US multinationals have fallen, and the share reporting sales of property, plant and equipment has gradually risen. Chinese data point the same way: the US share of FDI into China fell from over 10% in 2002 to 2% in 2011 and stayed low, though that measure can miss acquisitions and reinvested earnings.

The declines follow the 2018 tariffs, Covid in 2020 and Russia's invasion of Ukraine in 2022, and the timing suggests several reinforcing drivers. What the note does not do is separate them: trade tensions, geopolitics and investment screening cannot be told apart in the data, and whether the fragmentation continues is left open.