Recent data provide a warning sign for China’s economy, which has faced difficulties since moving away from its zero-COVID policy.
China has recorded its first quarterly foreign investment deficit since 1998, underscoring the trend that foreign companies are exiting the nation in response to economic challenges and geopolitical tensions.
Direct investment liabilities, a gauge of foreign direct investment (FDI), dropped by $11.8 billion in the third quarter, according to preliminary
data published by China’s State Administration of Foreign Exchange on Nov. 3. It’s the first time China has suffered a shortfall in foreign investment since the bureau started recording data in 1998.
The latest official data signal more trouble for the world’s second-largest economy, which
is faltering amid a property crisis and historically high unemployment of people aged 16 to 24.
Analysts suggest the FDI decline is linked to China’s interest rate disadvantage.
“Some of the weakness in China’s inward FDI may be due to multinational companies repatriating earnings,” Goldman Sachs wrote in a note, as reported by Reuters. With interest rates in China “lower for longer” and rates outside of China higher for longer, “capital outflow pressures are likely to persist.”
Some experts have said that the drop in direct investment liabilities, which track the financial transactions of foreign-owned businesses in China, is likely influenced by geopolitical tensions with the West.
Julian Evans-Pritchard, head of China economics at Capital Economics, said the unusually large interest rate gap “has led firms to remit their retained earnings out of the country,” according to Reuters.
Although he said he sees little evidence that foreign companies are, on aggregate, reducing their presence in China, he did predict that “over the medium-term at least, increasing geopolitical tensions will hamper China’s ability to attract FDI and instead favor emerging markets that are more friendly to the West.”
Worst Outlook in Decades
In a
survey from the American Chamber of Commerce (AmCham) in Shanghai, 60 percent of respondents cited growing U.S.–China tensions as a critical challenge in China. The AmCham said in the annual report that the investment climate for U.S. businesses in China was the worst in decades.
“The report showed that amid US-China bilateral tensions, Covid disruptions, and macroeconomic pressures, member companies report worsening business results and a less optimistic outlook for China,” the AmCham stated.
“2023 was supposed to be the year investor confidence and optimism bounced back after years of Covid disruptions and restrictions,” the report said. “However, the rebound has not materialized, and business sentiment has continued to deteriorate.
“Despite the end of COVID-era constraints, the percentage of companies describing themselves as optimistic or slightly optimistic hit a record low of 52 percent.”
That was the lowest business confidence level that AmCham has recorded since its first report, in 1999.
Last month, a
report from the Atlantic Council GeoEconomics Center and Rhodium Group, a Washington-based think tank, suggested that China’s economy needed structural reform.
“The economic malaise that policymakers in Beijing are staring down now is not caused by cyclical factors like Covid, but by a failure to reform the country’s economic system,” it read.
The report indicated that the root problem of China’s economy is its “persistent structural reform gap,” which resulted in “lagging behind” advanced economies “in most market dimensions.”
Deteriorating Business Environment
Several raids and arrests earlier this year have
rattled foreign investors. According to data from Goldman Sachs cited by Reuters, China’s foreign exchange outflows in September sharply increased to $75 billion, the most substantial monthly increase since 2016.
The challenges confronting U.S. companies operating in China extend beyond concerns such as
state subsidies for Chinese competitors and
intellectual property theft. A fresh set of issues, including “exorbitant fines without any explanation” and investigations into U.S. firms, was highlighted by Commerce Secretary Gina Raimondo during her
visit to China in late August while speaking to senior Chinese economic officials.
What compounds the situation is the vaguely worded
anti-espionage law, which went into effect on July 1. The legislation expanded the scope of “espionage activities” to include “documents, data, materials, or items related to national security and interests” without specifying what falls under national security. Ms. Raimondo said the amendment to the legislation is “unclear and sending shockwaves through the U.S. community.”
“Increasingly, I hear from American business that China is uninvestible because it’s become too risky,” she
told reporters aboard a high-speed train to Shanghai on Aug. 29.
Since March, the Chinese authorities have
raided due-diligence company Mintz and consulting firm Capvision, questioned Bain & Co.’s staff, and
investigated chipmaker Micron.
Reuters and Indrajit Basu contributed to this report.
