Investment flows between the U.S. and China fell to the lowest level in five years amid escalating tensions between the two countries, according to a study led by research firm Rhodium Group.
Two-way direct and venture capital investments between the U.S. and China totaled $13 billion in the first six months this year, according to the report on Thursday. That's an 18% fall from the second-half of 2018 and the lowest level since January-to-June in 2014, the report published Thursday said.
Relations between the U.S. and China — the two largest economies in the world — have been rocky over the past year. What started out as a trade dispute in recent months spilled over to areas such as technology and security, which affected sentiment among investors.
Some Chinese firms had initially considered setting up manufacturing in the U.S. to avoid elevated tariffs, but put their plans on hold as bilateral tensions escalated, said Rhodium. One such company is tech firm Bitmain Technologies, which froze its planned investment of $500 million, the report said.
Beijing's tighter controls on capital outflows were another reason behind the drop in Chinese acquisitions of U.S. assets, although American regulators have also been tougher in approving purchases by China, according to the study.
In terms of capital flow from the U.S. to China, a notable fall was seen in American venture investments into the Chinese technology sector, the report showed.
"This drop came as investors became more selective in the face of increasing economic uncertainty and the growing perception that parts of China's tech ecosystem (for example in areas like artificial intelligence and the shared economy) had become overheated after years of rapid growth," Rhodium said in the report.
Future flows
The latest drop in two-way investments coincided with an escalation in tensions between the U.S. and China earlier this year.
Trade negotiations broke down in May as Washington increased tariffs on $200 billion of Chinese goods. The administration of U.S. President Donald Trump also blacklisted Chinese tech giant Huawei, forcing American firms to cut ties with it. China responded with elevated tariffs on $60 billion of U.S. goods.
Both sides agreed to resume talks after U.S. President Donald Trump and Chinese President Xi Jinping met in June at the G-20 summit in Japan. An American delegation was in Shanghai this week, while representatives from China are expected to head to Washington in September.
Developments in bilateral relations will influence the amount of money that flow between the U.S. and China, according to the report.
"Policy and politics remain the dominant variables for the future trajectory of two-way capital flows between the United States and China," Rhodium said.
"Breakthroughs, even if partial, would at least demonstrate to market participants that rational solutions to concerns are possible," it added. If this round of talks also fails, it is likely that calls for accelerating financial decoupling — with even deeper harm to two-way capital flows — will get further traction."