Just a few years ago, Chinese money was rippling across the rich world. Chinese investors were making blockbuster deals and snapping up trophy assets, from luxury homes and five-star hotels in New York to a Swiss chemical company and a German robotics giant.
That era is over.
Chinese investment is retreating from the West as hostility to Chinese capital has grown. Increasingly, Chinese companies are instead spending money on factories in Southeast Asia and mining and energy projects in Asia, the Middle East and South America, as Beijing seeks to cement alliances in those places and secure access to critical resources.
The biggest recipient of Chinese investment so far this year is nickel-rich Indonesia, according to a preliminary estimate of Chinese investments compiled by the American Enterprise Institute, a conservative think tank, and viewed by The Wall Street Journal. Nickel is a key component in many of the batteries used to power electric vehicles.
The shift in investment flows shows how China is responding to souring relations with the U.S.-led West, and is strengthening trade and investment links with other parts of the world, in ways that could create new fault lines in the global economy.
The retreat of Chinese money in the West could lead to less job creation in some countries, while also reducing the pool of capital into which entrepreneurs in places such as Silicon Valley can tap. China’s weak economy is already depriving the world of one of its traditional growth engines.
More broadly, the shift is indicative of a world in which globalization is ebbing and geopolitical tensions are more likely to fester.
Direct overseas investment from China to the rest of the world fell by 18% from a year earlier by one new measure released recently. The latest level marks a decline of 25% from a peak in 2016, as overseas mergers and acquisitions have plummeted and Beijing has tightened rules to curb capital flight.
Despite Beijing’s easing of Covid-19 restrictions last year, China is unlikely to return to the heyday of overseas deal making, in large part because of rising geopolitical tensions with the U.S. and its allies, who according to analysts are blocking more Chinese investments on national security grounds.
Within China, a weakening currency, the struggling private sector and Beijing’s growing focus on building up its domestic economy to enhance China’s self-sufficiency will also damp its investment outflows, the analysts added.
“By and large, the room for China to channel investment to foreign advanced economies is shrinking,” said Louis Kuijs, chief Asia-Pacific economist at S&P Global Ratings. It is unlikely that China’s overseas investment flows will increase significantly in the next three to five years, he said.
Capital ShiftChinese investment is pivoting away from big?Western economies as relations sour.Change in share of Chinese overseas?investment since 2016, in percentage pointsSource: American Enterprise InstituteU.S.EuropeSouth?AmericaMiddle East?and North?AfricaEast Asia-20020-40Instead, China will likely realign investments to cement its dominance in such sectors as renewable energy and electric vehicles. That likely means doubling down on investment in emerging markets from Southeast Asia to the Middle East and Africa, as Chinese factory owners look for places to expand operations and find new customers, and Beijing focuses on markets rich in resources.
The Chinese automaker BYD said this month that it plans to invest more than $600 million in several car plants in Brazil.
“While Xi Jinping is alive, we are not going back to 2016,” said Derek Scissors, a senior fellow at the American Enterprise Institute, referring to the high-water mark of Chinese investment overseas. He said that while the U.S. economy isn’t likely to miss Chinese capital too much, its retreat could be more painful for smaller Western economies such as Australia, Canada or Hungary.
Less Chinese money for Western economies does have some upsides. It could reduce the kind of speculative behavior that drove up real-estate prices, for example, as it did in places including Canada, the U.S. and Australia before the pandemic.
“When they were buying it, they moved the market,” said Jim Costello, chief economist at MSCI Real Assets, a real-estate research firm. “They made everyone step up their game and bid more.”
Chinese investors ignited a speculative frenzy in markets such as New York City in the middle of the last decade. The insurer Anbang bought the Waldorf Astoria for $1.95 billion in 2015, at the time the most expensive purchase of a U.S. hotel on record.
Anbang was taken over by the government in 2018 shortly before its founder was sentenced to 18 years in prison for financial crimes related to fraud and abuse of power. A plan to convert the Waldorf Astoria to luxury apartments hasn’t been completed.
Outward direct investment is weaker lately across the world, not just from China. Across all countries, including the U.S., outbound investment dropped 14% in 2022 from a year earlier, as inflation, recession fears and financial-market turbulence put investments on hold, data from the United Nations Conference on Trade and Development show.
But China’s decline has been steeper and stretches over a longer period, particularly in developed economies, a sign of economic detachment from the West.
U.N. data show overseas investment by China fell to around $147 billion in 2022, a decline of 18% compared with a year earlier. It peaked at $196 billion in 2016.
Before 2016, Beijing actively encouraged Chinese companies to invest abroad to help expand China’s economic clout. Conglomerates such as HNA and Dalian Wanda plowed cash into global banks, hotel chains and movie theaters.
The acquisition bonanza drew comparisons with corporate Japan’s run of purchases in the U.S. and beyond in the 1980s, when Japanese companies scooped up steel plants, landmark hotels and film studios.
By 2016, however, worries about capital outflows and financial stress at Chinese conglomerates led Beijing to tighten capital controls and step up scrutiny of companies’ deal making.
More recently, attitudes regarding Chinese takeovers have hardened as relations with the U.S.-led West have deteriorated. Washington and its allies have clashed with Beijing over issues including national security, trade and Taiwan.
In addition, China has been rethinking its Belt and Road Initiative focused on building infrastructure in the developing world. Officials want Chinese lenders to take a more cautious approach to new projects after billions of dollars in loans went sour.
In 2016, Chinese companies and state-owned entities made 120 investments in the Group of Seven advanced economies, 63 of which were in the U.S., according to a database of Chinese projects overseas maintained by the American Enterprise Institute and the Heritage Foundation, another U.S.-based conservative think tank.
Deals included the purchase of the computer-printer maker Lexmark in the U.S. by a consortium of Chinese buyers and the sale of the German robotics maker Kuka to China’s Midea.
Last year there were just 13 Chinese investments in G-7 countries. In 2016, the $84 billion spent by Chinese companies on investments in the G-7 represented around half the total China invested overseas.
In 2022, investments in G-7 economies totaled $7.4 billion, or just 18% of China’s overseas investment that year, according to the American Enterprise Institute database.
China’s foreign direct investment in Europe reached a decade low of the equivalent of $8.8 billion in 2022, according to a report by the New York-based research firm Rhodium Group and Mercator Institute for China Studies, a think tank based in Berlin.
The electric-vehicle industry was a rare bright spot attracting Chinese investment, though the scale isn’t large enough to offset shrinking transactions elsewhere.
“China’s fragile economic situation and geopolitical pressures make a rebound to mid-2010 investment levels unlikely,” wrote the authors of the report, published in May.
Chinese companies and state entities invested a combined $24.5 billion in Asia, South America and the Middle East last year, according to the American Enterprise Institute database, a 13% increase from 2021. Deals included a $1.9 billion investment by Cnooc, the Chinese state-owned oil giant, in Brazil and investments by the automakers Great Wall Motor and BYD in Thailand.
In the first half of this year, foreign investment by Chinese companies totaled $29.5 billion, according to the American Enterprise Institute’s preliminary estimate, pointing to a modest pickup in overseas activity now that the pandemic has retreated.
Indonesia was the top recipient thanks to its bounty of strategic minerals, receiving 17% of that total, though that estimate could change with more information on the precise timing of investments.