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China Slashes US Investments

A photo of downtown Los Angeles skyline with the towering Oceanwide Plaza seen in the back with the crane. The Beijing based developer Oceanwide Holdings suspended the L.A. project in January and only a trickle of work has been spotted since then.
A photo of downtown Los Angeles skyline with the towering Oceanwide Plaza seen in the back with the crane. The Beijing based developer Oceanwide Holdings suspended the L.A. project in January and only a trickle of work has been spotted since then.

China's direct investment in the U.S. has slowed to a trickle, dropping by 80% from 2016 to 2018, according to New York-based research provider Rhodium Group.

Among the hardest-hit sectors are real estate and hospitality, with Chinese investors no longer scrambling to buy prime properties in cities such as New York, Chicago, San Francisco and Los Angeles.

Chinese real estate investment in the U.S. tripled from 2015 to 2016, reaching a record $16.5 billion. In contrast, not one real estate and hospitality investment reached more than $100 million during 2018, the Rhodium Group found.

Chinese developer Oceanwide Holdings’ U.S. footprint includes prime properties in San Francisco and Los Angeles. Construction reportedly has been suspended on one of the towers at the San Francisco Oceanwide Center, while construction has come to a standstill at the Los Angeles Oceanwide Plaza.

“The skylines are no longer filled with cranes, really supplied by Chinese investments coming over here in the downtown region,” said Stephen Cheung, president of World Trade Center Los Angeles and executive vice president of the Los Angeles County Economic Development Corporation.

“What we're worried about [is] the construction that's already here that cannot be finished because of the financing situations,” Cheung said.

Construction work stalled

The billion-dollar Oceanwide Plaza is located in a prized location near the Los Angeles convention center and the complex where the Lakers and Clippers play basketball. Construction stalled in January for the condo, hotel and retail space, and Cheung said he has seen very little activity since then.

The standstill at Oceanwide Plaza is but one sign of a sharp drop in capital flowing from China at a time of heightened tensions between Washington and Beijing.

Overall, direct foreign investment between the two superpowers peaked in 2016 to a record $60 billion, then dropped drastically, according to the Rhodium Group.

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One reason for the decline is a change in China’s monetary policy.

“There were the currency controls out of China, where a lot of companies were parking money. I think it was probably to get money out of China into a safe investment. And at the end of the day, the Chinese cracked down,” said Dale Goldsmith, a land use lawyer and managing partner at Armbruster Goldsmith & Delvac LLP.

“The Chinese companies couldn't get the money out of China even though they committed to certain projects. So certain projects here we've seen stalled,” Cheung said.

Another reason for the drop in direct Chinese investment is increased vigilance by a federal watchdog organization, the Committee on Foreign Investment in the United States (CFIUS). The Rhodium Group estimates the committee's scrutiny has led Chinese investors to abandon more than $2.5 billion in U.S. deals.

A relatively strong U.S. economy is another factor.

“The dollar has been very strong, making investment a lot less attractive for the Chinese and in the states. On top of it, you'd have skyrocketing construction costs,” Goldsmith said.

To top it all off, a trade war persists between the U.S. and China, sowing uncertainty in an already challenging investment climate.

“As the tension is escalating, I think a lot of the Chinese companies are wary in terms of whether they should enter the U.S. market,” Cheung added.

Southeast Asia gains

The trade war is creating another trend: to avoid high tariffs, international companies are moving manufacturing out of China and into Southeast Asian countries.

In some countries, such as Vietnam, the trade war is creating new wealth.

To offset a potentially negative impact of the trade war in a country such as Indonesia, Muhammad Zulfikar Rakhmat, a research associate at the Institute for Development of Economics and Finance in Jakarta, advised in an op-ed he co-authored in that Indonesia increase its direct foreign investment.

In Los Angeles, Cheung said he is seeing a “massive influx” of interests from Southeast Asian countries.

“Vietnam is now looking very carefully into the Los Angeles region, given the Southern California region has such a large Vietnamese population," he said. "We're also working with our partners in Singapore and Indonesia and Thailand to really expand those opportunities, because we have been dependent on China for such a long time.

"We really have to look for alternate solutions as this trade war continues, that trade tension continues, and investment is slowing down significantly," Cheung added.

So long as economic tensions remain high between Washington and Beijing, Los Angeles and other U.S. cities will have to look elsewhere for investment capital.