In yet another setback for China’s already beleaguered economy, foreign firms are pulling their earnings out of the country. American, Japanese, and European companies—some long-established in China—have rethought former plans to modernize and expand and have begun to send their profits home or elsewhere in Asia and even further afield.
The trend has been developing for some time. Its causes are diverse—some immediate, some more fundamental—but either way, China’s economic recovery looks even more problematic because of it.
The outflow has been gaining momentum for more than a year. During the 18 months through September, the most recent month for which data are available, foreign companies pulled a total of $160 billion of earnings out of the country. Withdrawals in just the summer quarter were so large that they overwhelmed foreign investment inflows so that, for the first time in a very long time, China suffered a net outflow of foreign-based funds—to the tune of $11.8 billion.
There can be little doubt that these significant funds flows have contributed to the almost 6 percent decline that China’s yuan has suffered relative to the U.S. dollar so far this year.
Some of this movement reflects an ultimately transitory influence, that of relative interest rates. While the People’s Bank of China has cut interest rates in an effort to encourage consumer spending and capital investment, the U.S. Federal Reserve and the European Central Bank have raised interest rates as part of their anti-inflationary policies. The Bank of England, the Bank of Canada, and the Federal Reserve in Australia have also raised rates. To get the best return on retained earnings before deploying them on a more permanent basis, business managers have naturally sent the funds to places where they can get the highest rates.
If this were the whole story, the outflows of the past year and a half would be easy to dismiss as something that will reverse as financial conditions change, and they inevitably will. But the funds flows also reflect more fundamental and lasting influences. One is the weakening of China’s economy. Exports, still critical to Chinese growth, have declined, while industrial activity has slowed and recently hinted at an outright decline. Failures among property developers, such as Evergrande and Country Garden, have stolen from the economy the positive effects of residential construction that, for years, had helped spur economic growth.
Also discouraging to foreign business managers is the ineffectiveness of several steps taken recently by Beijing to get the economy back on an acceptable growth path. Few are talking yet about an outright economic contraction. Still, the situation nonetheless impels business managers to consider their earnings—even that part emanating from Chinese operations—as better deployed elsewhere.
Still more troubling for business managers are the growing trade and diplomatic strains between China and the West. Washington has blocked the sale of certain technologies to China and also forbade Americans from investing in Chinese technological ventures. Beijing has responded by blocking the export of vital materials to the West and Japan. For foreign companies operating in China, these less-than-friendly policies—even if far short of open conflict—raise uncertainties and risks and make China a less attractive place to do business. Certainly, they prompt a rethink of expansion plans.
If these considerations weren’t enough to change business thinking and practices, Beijing’s increased belligerence toward Taiwan and stepped-up surveillance of foreign firms operating in China has unnerved many. In just the past few months, Chinese authorities have raided two U.S. firms operating in Shanghai: Bain & Co. and Mintz. These authorities detained several Mintz employees and fined the firm.
On top of all else that’s happening in China and with China trade, these implicit threats offer much reason for Americans, Europeans, and Japanese to consider getting out while the getting is good. The situation certainly argues strenuously against any enlargement of their presence in the country.
Because these earnings trends reinforce other evidence that Western and Japanese businesses are rethinking their presence in China altogether, prospects for the Chinese economy look even more problematic than previously. In trying to turn things around, Communist Party leader Xi Jinping has his work cut out for him. It certainly isn’t apparent that he can perform such a trick any time soon.
