China overtook the US as the top foreign investment destination last year

China overtook the United States as the world’s top destination for new foreign direct investment last year, as the Covid-19 pandemic amplifies a shift to the east at the center of gravity of the global economy.

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New investments by foreign companies in the U.S., which for decades ranked first, fell 49% in 2020, according to UN data released on Sunday, as the country struggled to contain the spread of the new coronavirus and economic production plummeted.

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China, which has long been in second place, has seen direct investment by foreign companies rise by 4%, said the United Nations Conference on Trade and Development. Beijing used strict restrictions to largely contain Covid-19 after the disease first emerged in a city in central China, and China’s gross domestic product grew despite the contraction of most other major economies last year. .

The investment figures for 2020 underline China’s move towards the center of a global economy long dominated by the US – an accelerated change during the pandemic, as China consolidated its position as the world’s shop floor and expanded its participation in global trade.

Although China attracted more new inflows last year, the total stock of foreign investment in the United States remains much larger, reflecting the decades that have passed as the most attractive location for foreign companies looking to expand outside their domestic markets.

Foreign investment in the US peaked in 2016 at $ 472 billion, when foreign investment in China was $ 134 billion. Since then, investment in China has continued to increase, while in the U.S. it has fallen every year since 2017.

The Trump administration encouraged American companies to leave China and reestablish operations in the United States. It also warned Chinese investors that acquisitions in the United States would face fresh scrutiny for national security reasons – cooling Chinese interest in American trading.

The sharpest drop in foreign investment in the US last year reflects the broader economic slowdown due to the effects of the coronavirus pandemic, said Daniel Rosen, a founding partner at Rhodium Group, an independent research firm in New York, which has long analyzed the USA. Economic relationship with China.

“I don’t think there is anything to be said for certain about the impact of the slowdown in FDI in the United States, compared to all other successes in the American economy,” he said.

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It is natural for foreign investment to decline dramatically in the United States due to the circumstances, because they have an open market economy, while China does not, Rosen said. Looking to the future, he said: “There is no reason to worry about the prospects for FDI in the United States, as long as the US continues with its basic competitive open market system.”

Foreign direct investment captures things like the construction of new factories by foreign companies or the expansion of existing operations in a country or the acquisition of local companies.

In China, the flow of investment from multinational companies continued despite the pandemic upheavals, with companies from American industrial giant Honeywell International Inc. and German sportswear maker Adidas AG expanding its operations there.

Unctad does not expect to see a significant revival of foreign direct investment this year, either globally or in countries that saw declines in 2020.

“Investors are likely to remain cautious about committing capital,” said James Zhan, director of investments and companies at Unctad. He does not expect a real recovery until 2022. Still, he said, “the road to full FDI recovery will be rough.”

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While the sharp drop in foreign investment in the U.S. is due to the pandemic, it is also making companies rethink future investments, said Joseph Joyce, professor of international relations and economics at Wellesley College.

“Companies are reevaluating their policies on global supply chains, on foreign markets, on their own use of technology,” said Joyce. “The pandemic is making all of these companies rethink the most basic assumption about where they are located.”

The White House did not immediately respond to a request for comment.

Unctad’s figures show a strong divide between East and West in the global economy. In 2020, East Asia attracted a third of all foreign investment globally, its largest share since the beginning of registrations in the 1980s. India increased by 13%, driven in large part by the growing demand for digital services.

In the West, the European Union fell by 71%. The United Kingdom and Italy, which suffered high mortality rates and deep economic contractions, did not attract new investments. Germany, which did better on both accounts, fell 61%.

When the pandemic first hit early last year, Unctad expected China to experience a huge drop in foreign investment and the United States to come out largely unscathed. But China’s economy reopened in April, as the United States and Europe began a series of continuous blockages and disruptions.

Beijing’s ability to quickly control the coronavirus within its borders has helped its economy to recover relatively quickly and has reinforced China’s appeal – even before President Biden took office, which some investors hope can usher in a new period of less ties stormy weather between USA and China.

After FDI in China plummeted in the early months of 2020, Chinese authorities endeavored to reassure foreign investors and accommodate any concerns they might have. “We must implement policies aimed at containing the drop in foreign trade and foreign investment,” Chinese Prime Minister Li Keqiang told the country’s cabinet in March.

Some foreign companies have suspended their expansion plans in China and, in some cases, have started to withdraw their investments. But as China’s recovery gained momentum and the rest of the world began to look increasingly difficult, foreign companies began pouring more money into China, seeing the country as a production base and a critical growth market for China. your products.

Walmart Inc. said at an investment conference organized by the city government in Wuhan, the city that was the first center of the pandemic, that it will invest 3 billion yuan, equivalent to $ 460 million, in Wuhan over the next five years. Starbucks Corp. is investing $ 150 million to build a roaster and an innovation park in the city of Kunshan, in eastern China.

Tesla Inc., for its part, is expanding the capacity of its Shanghai plant and adding a research center, while Walt Disney Co. continues to build a new theme area for its Disneyland park in Shanghai – despite a second consecutive year of less frequency in the park.

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Medical and pharmaceutical investments were especially active when the coronavirus hit the global economy. Chinese state broadcaster Chinese Central Television reported in April that several global pharmaceutical companies are moving forward with their expansion in China, including AstraZeneca PLC, which is about to establish regional headquarters in at least five Chinese cities.

The resilience of foreign investment in China runs counter to previous expectations that foreign companies would seek to reduce their strong dependence on the country as a key part of their supply chains, having seen some disruptions as a result of new tariffs on trade between the country and the USA

Seoul Semiconductor Co., a South Korean chip maker with extensive operations in China, illustrates the difficulty of leaving China, despite numerous incentives to do so. The company in 2017 started thinking about moving part of the production of its light-emitting components to Vietnam.

“We were very dependent on China,” said Hong Myeong-ki, the company’s co-CEO. But although the company manufactures almost half of its products in Vietnam, Hong now has no plans to move from China.

The same trend can be seen among Japanese companies operating in China, of which only 9.2% said they are transferring or considering transferring production from China in a September survey by the Japan Foreign Trade Organization, the lowest level in five years.

“They need to reduce excessive dependence on supply chains in a single market,” said Ding Ke, a researcher at Jetro in Tokyo. “But the biggest risk they have identified is losing the Chinese market.”