U.S.-China Investment Ties: Overview
Updated January 15, 2021
U.S.-China Investment Ties: Overview
Background
$1.05 trillion, respectively, in Treasury securities.) These
Investment is playing a growing role in U.S. commercial
figures may understate China’s actual holdings because of
ties with the People’s Republic of China (PRC or China).
the government’s purchases of securities through offshore
For many years, the PRC government invested much of its
financial centers (e.g., Cayman Islands).
foreign exchange reserves in U.S. assets, particularly U.S.
Figure 1. Foreign Holdings of U.S. Securities in 2019
Treasury securities. China is the world’s largest holder of
(in bil ions of U.S. dol ars)
foreign exchange reserves and had $3.2 trillion in reserves
as of November 2020. These large reserves stem largely
from China’s trade surplus and investment inflows.
Government actions to halt or slow the appreciation of its
currency and restrict capital outflows also have boosted
reserves. Since 1999, the PRC government has pushed an
outward investment policy that has sought to diversify its
overseas investments into hard assets by encouraging its
companies—many of them state-tied firms—to invest
overseas. These investments have targeted gaining access to
critical raw materials and cutting-edge technology and
establishing an overseas presence to expand infrastructure
and create markets for Chinese goods and services.
While a significant share of China’s investment in the
Source: CRS with data from the U.S. Department of the Treasury.
United States is in U.S. public and private securities, U.S.
Notes: Long and short-term U.S. securities at the end of June 2019.
capital flowing into China largely has taken the form of
Concerns about China’s Holdings
foreign direct investment (FDI), in part due to China’s
restrictions on portfolio investment and investment rules
Some analysts and Members of Congress have raised
concerns that China’s large holdings of U.S. securities give
that tie sales and procurement requirements or incentives to
an investment or manufacturing presence. Initial U.S.
it leverage over the United States. They argue, for example,
investment in China focused on export-oriented
that China could seek (or threaten) to liquidate a large share
manufacturing. Since the 1990s, U.S. investment has
of its U.S. assets or significantly cut back its purchases of
expanded into manufacturing, distribution, and services for
new securities to influence U.S. government decision-
the domestic market as well. In recent years, China has also
making or signal displeasure over a policy dispute. Others
sought to open gradually certain participation in its capital
contend that these holdings give China little practical
and debt markets to foreign investors.
leverage because such moves would likely cause the U.S.
dollar to depreciate sharply against global currencies and
China’s Holdings of U.S. Securities
reduce the value of China’s remaining U.S. dollar holdings.
U.S. financial securities consist of securities issued by the
Congress has focused on potential risks arising from areas
U.S. government and private sector entities. They include
in which the U.S. government may lack visibility and
Treasury securities, government agency securities,
understanding of aggregate PRC financial holdings in the
corporate securities, equities (e.g., stocks), and other debt.
United States and U.S. holdings in China. For example, in
As of June 2019 (the most recent period for which complete
the 116th Congress, some Members introduced legislation
data are available), China’s investment in U.S. securities
that would have required the Secretary of the Treasury to
totaled $1.5 trillion, down $63.4 billion (4%) from June
submit to Congress a report on the exposure of the United
2018 levels, making China the fifth-largest foreign holder
States to the PRC financial sector (S. 4629). In addition, the
(Figure 1). China’s share of total foreign holdings of U.S.
2021 National Defense Authorization Act (P.L. 116-283)
securities stood at 8% in 2019, down from its all-time high
requires the Secretary of the Treasury to conduct a study
of 15% in 2009.
about the extent to which China’s increasing global trade
U.S. Treasury securities are the largest category of U.S.
and investment exposes the international financial system to
securities and one of the main vehicles through which the
increased risk relating to illicit finance.
U.S. government finances budget deficits. As of June 2019,
over 72% (or $1.11 trillion) of China’s total U.S. public and
Foreign Direct Investment (FDI)
private holdings were Treasury securities, which are
China’s outward FDI stock globally is estimated to have
generally considered by investors as “safe-haven” assets.
risen significantly, from $35 billion (0.5% of world total) in
PRC ownership of these securities has decreased in recent
2001 to $2 trillion (6% of world total) in 2019. The level of
years from its peak of $1.31 trillion in 2011. In June 2019,
bilateral FDI stock, however, has remained low relative to
Japan overtook China to become the largest foreign holder
the size of the overall U.S.-China commercial relationship.
of Treasury securities. (Preliminary data indicates that as of
This has been due, in part, to a growing sense of uncertainty
October 2020, Japan and China hold $1.27 trillion and
and risk in China’s investment climate in light of rising
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U.S.-China Investment Ties: Overview
trade tensions, PRC government restrictions, and more
compensation, and spent approximately $3.8 billion on
recently, concerns about supply chain concentration
research and development (R&D).
exposed during the COVID-19 pandemic. While the PRC
Figure 2. China’s FDI Stock (UBO) in the U.S.
government has made changes to its FDI policy framework,
(in bil ions of current U.S. dol ars)
it continues to impose, both formally and informally, terms
and restrictions on foreign investment. The Organization for
Economic Cooperation and Development (OECD)’s 2019
FDI Regulatory Restrictiveness Index, which measures
statutory restrictions on FDI in 84 economies, ranked
China’s FDI regime as the third most restrictive.
Since 2017, increased PRC government scrutiny of capital
outflows and additional scrutiny by the U.S. government of
certain PRC state-directed and financed investments in
strategic sectors have contributed to a slowdown in Chinese
FDI flows to the United States. Concerns over the ability of
the Committee on Foreign Investment in the United States
(CFIUS) to review adequately the national security aspects
of FDI in the U.S. economy led to the enactment of the
Foreign Investment Risk Review Modernization Act of
Source: CRS with data from the U.S. Bureau of Economic Analysis.
2018 (FIRRMA, Subtitle A of Title XVII, P.L. 115-232).
Table 1. FDI by Industry: 1990:Q1 through 2020:Q2
The Act seeks to modernize CFIUS and expand the types of
investment subject to review, including certain non-
(cumulative value in bil ions of current U.S. dol ars)
controlling investments in “critical technology.”
Industry
China’s FDI
U.S. FDI
in the U.S.
in China
Recent surveys by U.S. and other business groups in China
Real Estate & Hospitality
$41.9
$22.8
suggest that firms may be increasingly circumspect about
ICT
$17.2
$40.6
China’s market prospects, due in part to perceived growing
Transport & Infrastructure
$16.7
$7.7
protectionism and trade tensions. Nevertheless, there are
Energy
$14.0
$20.7
areas of interest, as exemplified by several large deals, such
Entertainment & Education
$13.6
$11.6
as Tesla Inc.’s $5 billion investment in a factory near
Consumer Prod & Services
$9.8
$13.7
Shanghai, and Wall Street’s bullish response to discrete
Health (incl. Pharma & Biotech)
$8.6
$18.4
openings to several U.S. financial firms. Moreover, in the
Agriculture & Food
$7.7
$19.8
immediate term, as China became the first major economy
Financial & Business Services
$7.5
$21.0
to return to growth during the COVID-19 pandemic, it has
Other
$17.2
$81.8
become an economic bright spot for many companies. With
Total
$154.2
$258.0
the December 2020 announcement of a preliminary
European Union-China investment agreement, China has
Source: CRS analysis with data from Rhodium Group (RhG).
Note: RhG tracks investments using commercial databases and media reports.
reportedly agreed to partially open up certain sectors, which
Unlike BEA, RhG’s figures do not account for asset divestitures.
could make its market more attractive to some EU
investors.
Alternative Measurements of Bilateral FDI
Bilateral FDI Activity
Some analysts contend that U.S. and PRC government data
According to the U.S. Bureau of Economic Analysis
do not accurately reflect the value of China’s FDI in the
United States. Rhodium Group (RhG), a private consulting
(BEA), net U.S. FDI flows to China in 2019 were $7.5
billion (up 20% from 2018). Net FDI flows from China into
firm, for example, notes that BEA “omits flows which are
the United States were $4.3 billion (up 168% from 2018,
routed through third countries, a practice used extensively
by Chinese firms due to capital controls and inadequate
but down from the $18.0 billion level registered in 2016).
legal and financial infrastructure at home.”
Additionally, the stock of U.S. FDI in China was $116.2
According to
billion (up 6% from 2018), while China’s FDI stock in the
RhG, China’s gross FDI flows to the United States in 2019
totaled $4.8 billion and gross U.S. FDI flows to China stood
United States was $59.0 billion (up 6%), on an ultimate
beneficiary ownership basis (UBO) (Figure 2). In 2019,
at $13.3 billion. In addition, RhG estimates that between
China accounted for over 1% of total FDI stock in the
1990:Q1 and 2020:Q2, cumulative Chinese FDI in the
United States totaled $154.2 billion and U.S. FDI in China
United States, significantly lower than the shares of Japan
totaled $258 billion (Table 1). RG’s figures, however, do
and Canada—14% and 13%, respectively.
not account for asset divestitures. (FDI statistics also may
BEA also collects financial data of U.S. multinational
not always capture certain aspects of China’s U.S.
enterprises (MNEs) investing abroad. Data for 2018 (the
investment activity, including venture capital financing,
most recent year for which data are available) indicate that
private equity, R&D, technology licensing, and real estate.)
sales by foreign affiliates of U.S. firms in China totaled
$580.1 billion (up 7% from 2017). China was the third-
Andres B. Schwarzenberg, Analyst in International Trade
largest market for U.S.-affiliated firms overseas, after the
and Finance
United Kingdom ($776.2 billion) and Canada ($705.6
Karen M. Sutter, Specialist in Asian Trade and Finance
billion). In addition, U.S. affiliates in China employed 2.1
million workers, paid $40.1 billion in employment
IF11283
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U.S.-China Investment Ties: Overview
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https://crsreports.congress.gov | IF11283 · VERSION 4 · UPDATED