The downtown skyline of Los Angeles, California. Frederic J. Brown | AFP | Getty Images

Chinese home buyers last year ponied up much less cash in the U.S. as the trade war continues to escalate between the world's two largest economies. As President Donald Trump and President Xi Jinping prepare to meet this week, there are worries that decline in spending could extend further. U.S. property sales to Chinese buyers saw a 4% drop from 2017 to 2018, according to numbers provided by Juwai.com, China's largest foreign property sales site. "The worsening trade relationship between China and the US may cause Chinese investors to shift their presence into other key markets," property consultancy Knight Frank said in a report. It suggested that investment can instead go to major cities in Australia, Japan, and the United Kingdom, according to the firm's 2019 Wealth Report.

American properties have been struggling with international investors overall: All foreign spending on U.S. homes fell by 25% in 2018, according Juwai.com. U.S. homes have long been a favorite among Chinese foreign property buyers. But that's increasingly less of a sure thing amid the escalating trade tensions and China's tighter controls on money leaving the country.

Trade war and travel warnings

As the trade war between Washington and Beijing has been dragging on for just over a year, "Chinese buyer enquiries for US property were down in four out of the five last quarters," said Juwai.com CEO Carrie Law. "In the first quarter (of 2019), Chinese buyer enquiries on U.S. property were down 27.5% from a year earlier," she said. "Meanwhile, they were up in Canada, the UK, Australia, and Japan, all of which are often considered alternative destinations to the United States." But the trade war isn't the only factor driving the decline. Official warnings about U.S.-China travel are likely also pressuring spending. "Travel warnings are part of an overall environment of negativity between the two countries that is discouraging Chinese property buyers from investing in the U.S." Law said.

The U.S. flag flies at a welcoming ceremony between Chinese President Xi Jinping and U.S. President Donald Trump in 2017. Getty Images News | Getty Images

In January 2019, the U.S. Department of State issued a travel warning on China, suggesting citizens visiting China to "exercise increased caution in China due to arbitrary enforcement of local laws as well as special restrictions on dual U.S.-Chinese nationals." China then respond by issuing a safety warning in June for Chinese citizens and companies in the U.S. to "raise awareness, strengthen preventative measures and respond properly" when traveling and doing business in the United States. It's all part of a pattern that's making the United States less of an appealing destination for Chinese investment. "We call it the Trump Effect. It's a combination of anti-Chinese political rhetoric, a clamp-down on visa processing, and of course tariffs," Law said. "The Trump Effect is under-cutting some of the primary drivers of Chinese demand for US property" and hurting "the country's reputation as a safe investment," she added.

Capital controls

Some experts said the decline in Chinese property purchases in the U.S. can also be attributed to internal pressure in China. Neil Brookes, Asia Pacific head of capital partners at Knight Frank told CNBC last week that Chinese outbound capital fell 83% in 12 months, "largely due to trade wars and the government trying to stop money leaving the country." In the past two years China has been tightening its grip on capital outflows, which "has cast a shadow over outbound investment," according to a report by Knight Frank. The introduction of stricter controls has been partly driven by Beijing's concern about falling foreign exchange reserves, which the Chinese government uses to maintain the value of the yuan. The government has said its crackdown on capital crossing its borders is also part of an attempt to stem graft.

U.S. dollar and Chinese yuan bank notes are arranged for a photograph on September 7, 2017, in Hong Kong StudioEAST | Getty Images

Foreign home ownership has since then been "classified as a sensitive sector," according to the Knight Frank 2019 Wealth Report. In other words, investments into "overseas property markets require stringent official approval," and may attract unwanted attention.

Looking ahead