Why China’s FDI flow turns negative
In the third quarter of this year, outflow of foreign investment from China exceeded inflow, a net minus of US$11.8 billion – the first negative in the data since 1998.
The figures, released by the State Administration of Foreign Exchange, vividly show the deterioration of foreign direct investment (FDI) in China. Analysis shows that in September, FDI fell by 34 per cent from the same month in 2022 to 72.8 billion yuan (US$10 billion). The figure has been declining by double digits every month since May this year.
In a survey this September of member companies by the Japanese Chamber of Commerce and Industry, nearly half of respondents said that they would not invest in China at all in 2023 or would invest less than in 2022.
In September, the Nihon Keizai Shimbun newspaper reported that Mitsubishi Motors would end auto production in China after 11 years. It sold just 32,000 vehicles in China last year, down 50 per cent from the 2021 figure.
The reasons for the FDI fall are both economic and political. One is high interest rates for the dollar. This makes saving dollars more attractive and borrowing to invest overseas more expensive.
Another is the slowdown in China’s economy. The IMF forecasts GDP growth this year at 5.4 per cent, falling to 4.6 per cent in 2024 and 3.5 per cent in 2028, due to weak productivity and the ageing population.
A third is U.S. sanctions. On August 9, the Biden administration issued an executive order to the U.S. Treasury to create a new regulatory programme to prohibit or require notification of U.S. investments into China in sensitive sectors. It targets U.S. private equity and venture capital, as well as investment in semiconductors and AI.
The hostility toward China in the U.S. Congress and government puts pressure on U.S. companies to diversify away from China and ask their suppliers to produce elsewhere.
A fourth is China’s revised counter-espionage law, which came into effect in July this year. Yusuke Miura, a senior researcher at the NLI Research Institute, said China’s laws and regulations lacked transparency, which increased concerns on business continuity in the country. “Foreign firms are increasingly concerned about the authorities’ emphasis on security. It is unlikely their cautious stance toward China will change quickly.”
Relations with the European Union are also deteriorating. Last Monday European Commission president Ursula von der Leyen said: “we see a strong push to make China less dependent on the world and the world more dependent on China. Geopolitics and geoeconomics cannot be separated any more.”
The EU is angry about the widening trade deficit with China. In 2022, it reached a record 365.7 billion euros, up 46 per cent from 2021, according to EU figures. For the first nine months of this year, the deficit was US$170 billion, according to Chinese figures. The EU blames this on obstacles to entry into China’s market.
In September, its ambassador to China Jorge Toledo told a seminar in Beijing: a thousand barriers to market access have propelled the trade deficit to its "highest in the history of mankind".
Earlier this month, Jens Eskelund, president of the EU Chamber of Commerce in China, said that China had massive overcapacity in critical sectors, including vehicles, solar panels, wind turbines, chemicals and metals. It could produce 50 million cars a year, more than double domestic demand of 23 million, he said. It is likely to export this excess production.
The move into negative FDI also reflects a profound shift in the governance of China. When China began to open up and reform its economy, the priority was growth, with an average annual GDP target of at least eight per cent, to ensure near full employment and social stability. It was a spectacular success.
But, since Xi Jinping became party chief in November 2012, the priorities have changed. Joerg Wuttke, Eskelund’s predecessor at the EU Chamber, said: “President Xi has changed China. He is clearly a Marxist, a true believer. No-one is left to question or challenge him. I see no challenge for a long, long time. He is all about control and state companies.
"For him, security and stability are a priority. He is willing to sacrifice economic growth for the sake of stability – this is a game-changer from Deng Xiaoping. He wants to make China less dependent on the outside world," he said.
In his new order, foreign investment has a less important place.
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