Chinese Gov’t ‘Causes an Investment Gap with U.S.’

(Beijing) – There is a widening gap between Chinese investments in the U.S. financial sector and those heading the other direction, mainly caused by the Chinese government’s restrictions on market access against foreign investors, an expert from the U.S. research firm Rhodium Group says.

Chinese merger and acquisition deals in the U.S. financial services this year are expected to break a record, reaching more than US$ 2.8 billion, up from last year’s US$ 100 million, data from Rhodium show.

Deals that are expected to be completed next year totaled nearly US$ 1.6 billion.

Meanwhile, U.S. investments in the Chinese financial sector are expected to reach only US$ 115 million, down from the US$ 163 million last year, the data show.

An important factor behind the decline is restrictions on investment imposed by the Chinese government, said Thilo Hanemann, research director at Rhodium. He said the limitations amounted to a protectionist barrier that does not affect Chinese investors in the U.S. financial sector as much.

The major restriction on U.S. companies is a limit on the equity stakes they can hold, he said.

Chinese investors are far more likely to be allowed to hold majority ownership in companies they invested in the U.S. financial sector than U.S. firms seeking partners in China, and this was caused primarily by Chinese government restrictions, Hanemann said.

Investments worth US$ 4.4 billion from China to the U.S. financial sector, where Chinese investors hold bigger stakes than their U.S. partners in a co-founded venture, have been made or are expected to be completed from 2000 to the end of next year, Hanemann said.

Meanwhile, only US$ 731 million worth of investments heading the other direction have majority U.S. ownership, he said. In deals worth US$ 3.2 billion, U.S. investors’ ownership fell in the range of 10 to 50 percent.

Chinese government restrictions on market access are “particularly acute in the most attractive sectors under the new growth model, including high-tech manufacturing and modern services,” Hanemann said.

In sectors like communications and financial services, China scored 0.75 on the OECD FDI Regulatory Restrictiveness Index. The United States scored 0.11 and 0.042, respectively. Lower figures signify fewer restrictions.

The U.S. business community has been one of the most important drivers of an American policy of engagement with China, Hanemann said. If it is being excluded from attractive sectors of the Chinese economy, he warned, that could “tip the scale in favor of less engaging” policy toward China.

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