FOREIGN INVESTORS STAYING OUT OF CHINA

In September, foreign direct investment (FDI) in China totaled about $10 billion, down 34 percent year over year and the biggest decline since at least 2014 when figures first became available, the Financial Times reported.

FDI jumped 15 percent in January after Beijing abolished a drastic, three-year anti-COVID campaign but has dropped by double-digit percentages each month since, according to data service Wind.

Direct investment liabilities, a measure of foreign capital coming into the country, amounted to $6.7 billion in this year’s second quarter, compared to $21 billion in the first quarter and the lowest three-month total since 2000, the FT noted.

Total FDI in 2022 was $189 billion, according to China’s commerce ministry, which attributed FDI’s disappearance to “the outflow of reinvested earnings.”

“Foreign companies…are getting their profits out of China as fast as they can,” Brad Setser, a senior fellow at the Council on Foreign Relations, said to the FT.

Chinese companies bereft of foreign investment are now relying on government funding to fill the financial hole, one manufacturer told the FT.

One reason for the capital flight: high interest rates in the U.S. give American companies an incentive to “reshore” their capital at home.

Worries about the loss of FDI have worked their way to the top of China’s government. At the recent celebration of China’s troubled Belt and Road Initiative, president Xi Jinping lifted restrictions on foreign investment in China’s manufacturing companies.

TREND FORECAST: China has given foreign investors few incentives to remain, much less return.

Recent stimulus actions, which we detailed in “China Shifts Strategy, Announces Stimulus Spending” (31 Oct 2023), will help reawaken the economy to a mild degree, but, as we noted, still fail to address structural issues, including an aging and shrinking workforce, record youth unemployment, the nearly institutionalized, two-year-old real estate bust, and president Xi Jinping’s whimsical rule that has brought unannounced regulatory crackdowns on various industries.

The U.S. Federal Reserve’s “higher for longer” interest rates will keep a good deal of U.S. money tucked in safe at home in treasury bonds. China is simply too uncertain to lure anyone other than either speculators or an investor or business that has found a personalized niche.
When, or if, the world economy emerges from its current tumult, supply chains will have been reorganized, nations will have become more economically self-sufficient—one of our 2022 Top Trends—and China will not return to the same dominant role it played in global manufacturing and trade that it did in 2021 and 2022.