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Worsening Investment Relations with China Laid Bare in New Risk Assessment

China-Canada and China-U.S. relations have been tumultuous over recent years with the arrest of Huawei CFO Meng Wanzhou, the trade war, inflammatory Covid-19 rhetoric, and a number of other smaller grievances creating widespread tension. This has had real impacts on the investment landscape between China and the U.S. Recently, the Institute of World Economy and Politics of the Chinese Academy of Social Sciences (CASS), a leading government think tank, has cemented this fact by downgrading the risk assessment for outbound foreign direct investment (ODFI) in both Canada and the U.S., citing higher uncertainty.

Investment restrictions have been enhanced in the U.S. and Canada and much of the conversation surrounding these policy shifts has focused on China. In fact, given the present state of the investment landscape, it is perhaps not surprising for CASS to downgrade the U.S. and Canada from low to medium risk ODFI destinations. In 2020, the U.S. implemented further regulations under the Foreign Investment Risk Review Modernization Act (FIRRMA), and Canada launched new foreign investment restrictions in light of Covid-19 that enhance scrutiny, especially for deals involving state-owned enterprises, which have been a significant source of Chinese investment.

Whether or not this will materially affect the flow of investment has yet to be realized. Already Chinese FDI in Canada and the U.S. has fallen precipitously through 2018 to the present, hampered by capital outflow restrictions in China as well as the aforementioned conflicts. Its recovery is anything but certain, and more than accelerating a collapse or diminishing a recovery, this new assessment reflects the reality of the situation.

The competitive ranking system used by CASS assessed Canada as the 17th best place for Chinese investment, down from 7th place. The U.S., on the other hand, dropped from 18th to 27th place. The countries topping the list were Luxembourg, Germany, Australia, and Sweden. Interestingly, Australia retains a very high ranking despite their recent political disputes with China, tightening investment regulations, and the already steep dropoff of Chinese investment in 2020. Sweden’s relations with China has also faltered, even spurring Bjorn Jerden, head of the Asia Program at the Swedish Institute of International Affairs, to name it “the worst relationship with China of any EU country.”

Reflecting on these developments, it is important to remember the position China finds itself in. Political and rhetorical hostility towards China is stronger now across Western countries than it has been in recent years, as seen in polling data, which leaves China with fewer allies that possess highly developed economies. This relativity may be one reason that Australia has not been significantly demoted in risk assessment. Furthermore, this reality may be one factor that is supporting Canada, and possibly the U.S., from falling further in the ranking, given the intensity of the tensions pervading said relations.

Widely used by Chinese companies, CASS investment risk report can be seen as a denotation of the current state of our economic and political relations with China. For Canada, it highlights the struggle that faces lawmakers in balancing the interests of Canadians, where both the benefits of Chinese investment and the scrutiny surrounding said investment is weighed.

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