ANALYSIS: Are Foreign Companies Ditching China?

U.S. dollar notes were being counted next to stacks of 100 yuan (RMB) bank notes at a bank in Huaibei, in eastern China's Anhui Province, on Sept. 24, 2013.STR/AFP via Getty Images

News Analysis

Is there big trouble in little China?

The world’s second-largest economy is grappling with a tsunami of economic challenges, from deflation threats to shrinking factory activity. But the new threat to the Chinese economic landscape might be foreign capital waving goodbye to Beijing.

In recent years, multinational corporations in many different industries have become concerned with various geopolitical risks, central government intervention, and anemic growth. This is in addition to the wave of domestic problems, like ballooning local government debt and the collapse of the nation’s property sector, which accounts for about 30 percent of gross domestic product.

Whether reshoring trends or repatriating profits, China may need to plead with foreign entities to reconsider their plans to head back home.

Foreign Direct Investment Tumbles

A key measurement of foreign direct investment (FDI) into China turned negative for the first time since 1998, highlighting growing “derisking trends” and economic challenges.

According to new data published by the State Administration of Foreign Exchange (SAFE), direct investment liabilities, a gauge of the FDI, totaled negative $11.8 billion in the third quarter. By comparison, in the third quarter of 2022, this measurement stood at $14.1 billion.

SAFE figures describe direct investment liabilities as consisting of profits belonging to foreign firms that have not been returned home or allocated to shareholders.

Last month, the Ministry of Commerce published the primary FDI measurement, revealing an 8.4 percent decline in the first nine months of 2023. This was an acceleration from the 5.1 percent decrease in the first eight months of the year.

The latest capital outflows confirm that more foreign companies are removing their money from Beijing rather than reinvesting in their operations. While experts assert that China does not depend on foreign capital the way it used to, it does emphasize how corporations are adjusting their views on the Chinese economy.

“The Chinese economy, right now, is in a very bad situation,” said Dr. Tenpao Lee, a professor of economics at Niagara University, in an interview with The Epoch Times.

Paramilitary policemen patrol in front of the People's Bank of China, the central bank of China, in Beijing on July 8, 2015. Greg Baker/AFP via Getty Images

Politics of ‘Derisking’

China faces a broad array of challenges: anemic post-pandemic growth, deflationary pressures, and persistent deglobalization efforts.

The steady decline in the FDI has also applied pressure on the Chinese yuan, sliding about 6 percent against the U.S. dollar this year and touching its lowest level in a decade. Although monetary policymakers have been trying to reverse the yuan’s misfortunes, weakening investor sentiment in Chinese stocks, bonds, and new investments is weighing on the currency.

Market analysts have alluded to growth fears as the chief factor in the escalating capital outflows. However, Mr. Lee believes the intensifying capital outflows result from geopolitical strife and the increasing derisking efforts by the U.S. administration.

Ahead of the Asia-Pacific Economic Cooperation (APEC) summit next week, the White House has insisted that it is not decoupling from China but rather derisking by no longer depending on a single nation for its trade needs. Treasury Secretary Janet Yellen has been alluding to growing trade with Vietnam, Singapore, and India.

“In the long term, as we consider China as a threat, the long-term policy is that we’re going to move our sourcing to other countries. That’s the beginning of derisking from China,” Mr. Lee stated. “Realistically, that means you can move your investments, such as factory manufacturing, to other countries.

“That is a very difficult job to accomplish,” he added.

Chinese officials have pushed back against the derisking initiative. In September, Shu Jueting, spokesperson at the Ministry of Commerce, told reporters at a press conference that the best objective is stabilizing relations.

“We believe the best way to ‘derisk’ is to return to the consensus agreed to by the two heads of state at Bali, return China-U.S. trade relations to a healthy, stable development path,” the spokesperson said.

Exports Playing a Role

Since the COVID-19 pandemic, foreign entities have been diversifying their supply chains, reducing their exposure to Beijing, and reshoring operations.

A September survey by the American Chamber of Commerce in Shanghai showed that a little more than half of its 325 members were optimistic about their five-year business outlooks, the lowest since the survey was launched in 1999.

“China is becoming more challenging for foreign investors. What businesses need above all else is clarity and predictability, yet across many sectors companies report that China’s legal and regulatory environment is becoming less transparent and more uncertain,” said Sean Stein, the chairman of AmCham Shanghai, in the report.

Vanguard Group took the final step to remove its presence in China entirely. One of the world’s largest investment management behemoths shut down its Shanghai office in the country’s $4 trillion mutual fund market.

Corporate dissatisfaction and a domestic economic slump have also been witnessed in falling exports.

In October, China’s trade surplus narrowed to $56.53 billion, down from $77.71 billion in September and below the consensus estimate of $82 billion. The most notable factor in the National Bureau of Statistics (NBS) report was the worse-than-expected 6.3 percent year-over-year decline in exports. Shipments to its major trading partners were down across the board, including to the U.S. (negative 8.2 percent), the European Union (negative 12.6 percent), and Japan (negative 13 percent).

Should exports maintain the downward trajectory, this could have “wider implications” for the Chinese economy, says Vaibhav Tandon, an economist at Northern Trust.

“Exports were providing much-needed support to the Chinese economy as it grappled with stringent lockdowns and a tumbling property market. Millions of small firms are now struggling to stay afloat due to the drop in earnings. China’s domestic demand has remained lackluster,” Mr. Tandon wrote in a research note.

“Lower demand for Chinese goods has led to a slowdown in production and investment, contributing to a deflationary environment. A protracted period of falling prices will dent corporate profits and consumer spending, exacerbating debt burdens,” the note reads.

Consumer and producer inflation data will be published on Nov. 8. Economists project an annualized drop of 0.1 percent in the consumer price index (CPI) and a 2.7 percent year-over-year decrease in the producer price index (PPI).

‘Uninvestable’

Chinese leader Xi Jinping has reassured foreign investors that the nation remains a top investable market.

In September, central authorities loosened capital controls in Beijing and Shanghai, conveying to outsiders that they could transfer their money in and out of the economy without hiccups.

So far, these efforts have not extended confidence among foreigners. A myriad of problems, from mounting debt to repeated intervention in the private sector to sluggish expansion, have left a chorus of observers to speculate if China is now an “uninvestable” market.

“This raises the question of whether this fits the narrative of China becoming ‘uninvestable,” wrote Jeroen Blokland, the founder of investment research firm True Insights, on X, formerly Twitter.