The Money Flows

For a relationship that moves $584 billion in goods per year, the factory investment ties between the U.S. and China are strikingly modest. In 2024, American foreign direct investment into China — new factories, equity stakes in Chinese companies, reinvested earnings — totaled $5.1 billion. In the other direction, Chinese FDI into the United States was $1.8 billion.

To appreciate how small these numbers are, compare them with other relationships. The U.S. invested $38 billion in Canada and $18 billion in Mexico in the same year. American FDI into the United Kingdom exceeded $60 billion. Even tiny Ireland received more American direct investment than China did. The world’s most important bilateral trade relationship has the investment profile of a minor partnership.

This wasn’t always the case. American FDI into China peaked at $16 billion in 2008, as General Motors, Caterpillar, Apple (through its suppliers), and hundreds of other American companies expanded their Chinese operations. The financial crisis briefly interrupted the flow, and it never fully recovered. Increasing regulatory scrutiny on both sides — CFIUS review of Chinese investments in the U.S., and Chinese restrictions on foreign ownership — combined with rising geopolitical tension to chill the investment climate. By 2020, the Biden administration’s executive order restricting outbound investment in Chinese semiconductor, AI, and quantum computing companies formalized what had been an informal retreat.

Chinese FDI in the United States tells an even starker story. It peaked at $18 billion in 2016, when Chinese conglomerates like HNA, Anbang, and Wanda went on acquisition sprees, buying Hilton hotels, AMC Theatres, and Smithfield Foods. Then Beijing cracked down on capital flight, the deals dried up, and by 2020 Chinese FDI turned negative — meaning more Chinese-owned assets in the U.S. were being sold or liquidated than new ones acquired. The 2024 figure of $1.8 billion is roughly where it was twenty years ago.

The real financial story between the U.S. and China isn’t in factory investment — it’s in portfolio investment, and specifically in U.S. Treasury bonds. For two decades, China recycled its trade surplus by purchasing American government debt. China’s foreign exchange reserves swelled from $200 billion in 2000 to $4 trillion in 2014, and a substantial fraction was parked in U.S. Treasuries. At its peak in 2013, China held an estimated $1.3 trillion in U.S. government bonds, making it the largest foreign holder of American debt.

Then the selling began. The BEA’s portfolio investment data shows the shift in stark terms. In 2015, Chinese entities sold a net $225 billion in U.S. securities. In 2016, they sold another $270 billion. This was driven partly by China’s need to defend its own currency — the yuan was depreciating, and the People’s Bank of China sold foreign reserves (including Treasuries) to stabilize it. After a brief reversal in 2017–2018, the selling resumed: −$60 billion in 2020, −$39 billion in 2021, −$74 billion in 2023, and −$129 billion in 2024.

The 2024 figure is the largest annual net sale of U.S. securities by China in the BEA data. China’s Treasury holdings have fallen from their $1.3 trillion peak to an estimated $750–$800 billion. The selling has been gradual enough to avoid disrupting the Treasury market — other buyers, notably Japan and European funds, have absorbed the supply — but the trend is unmistakable. China is diversifying away from dollar assets.

The implications are both financial and strategic. Every dollar of Treasuries China sells is a dollar less of leverage over U.S. interest rates. The old fear — that China could “dump” Treasuries to destabilize the American economy — becomes less plausible as the holdings shrink. But it also means that the implicit financial compact that sustained the trade relationship for two decades — China ships goods, America ships dollars, China recycles those dollars into American bonds — is breaking down.

The least visible but most persistent financial flow between the U.S. and China is primary income — the returns each country earns on its investments in the other. This includes dividends, interest, and reinvested earnings from FDI and portfolio holdings.

In 2024, the U.S. earned $16.2 billion in income from its investments in China (profits from Apple’s Chinese operations, Intel’s Chengdu facility, GM’s joint ventures, and other American-owned assets). In the other direction, China earned $45.8 billion from its investments in the U.S. — overwhelmingly interest on Treasury bonds and other fixed-income securities. The result: a −$30 billion primary income deficit.

This deficit has been persistent. It was −$10 billion in 2004, grew to −$42 billion in 2008 as Chinese Treasury holdings ballooned, and has fluctuated between −$20 billion and −$30 billion since. The primary income deficit acts as a hidden amplifier of the overall imbalance: it adds $30 billion to the current account deficit beyond the goods and services figures. When you hear that the U.S.-China current account deficit was −$298 billion in 2024, roughly $30 billion of that comes from the income channel, not from trade.

The asymmetry has a structural explanation. China’s investments in the U.S. are dominated by safe, low-yielding assets — Treasury bonds, agency securities, and bank deposits. These generate steady but modest interest income. American investments in China are dominated by equity stakes in businesses — which can generate higher returns in good years but also fluctuate. In recent years, Chinese economic slowdown, regulatory crackdowns on tech companies, and restrictions on profit repatriation have depressed American investment returns in China, while rising U.S. interest rates have increased the income China earns on its remaining Treasury holdings.

The financial data tells a story of accelerating separation. American FDI into China has fallen to a fraction of its peak. Chinese FDI into the U.S. has turned negative in some years. China is actively selling its American securities holdings. And the regulatory environment — CFIUS on the American side, data security laws on the Chinese side — is making new cross-border investment increasingly difficult.

The contrast with the trade relationship is instructive. Despite tariffs, goods trade between the two countries remained at $584 billion in 2024 — lower than the peak but still enormous. It takes years to relocate a supply chain. But financial assets can be sold with a phone call. Regulatory barriers to new investment take effect immediately. The financial decoupling is running ahead of the trade decoupling because financial flows are more liquid, more easily controlled by regulation, and less dependent on physical infrastructure.

The implications extend beyond the bilateral relationship. China’s selling of U.S. Treasuries means the U.S. must find other buyers for its growing federal debt. China’s pivot toward gold, other currencies, and domestic debt instruments reduces the dollar’s role in Chinese reserve management. And the declining FDI flows mean fewer American executives with first-hand knowledge of Chinese markets and fewer personal connections across the Pacific — making the relationship more brittle, more dependent on government channels, and more prone to miscalculation.