Foreign direct investment is piling pressure on China’s economy

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Foreign direct investment into China has been falling on many measures, adding to the pressure on Beijing and local governments as they seek to combat the economic slowdown.

Financial Times calculations based on Chinese commerce ministry data compiled by Wind showed FDI fell 34 percent year-on-year to Rmb72.8bn ($10bn) in September, the biggest drop since monthly figures became available in 2014.

The weakness in FDI is part of a steady march of disappointing economic metrics since China lifted pandemic restrictions earlier this year. While foreign direct investment rose 15 percent in January from a year earlier, it has recorded double-digit percentage declines every month since May.

In renminbi terms, year-to-date inflows are 8 percent below last year’s record pace, according to data from China’s Commerce Ministry.

But the country’s balance of payments data also reveals a bleak picture of foreign investment. Direct investment liabilities, the measure of foreign capital flowing into the country, stood at $6.7bn in the second quarter based on a September revision of previous figures, the lowest in any quarter since 2000 and down from $21bn in the first three months. year.

The boom in foreign investment China experienced during the pandemic, despite the country being virtually sealed off to the outside world, contrasts with the recent downturn. According to data from the Ministry of Commerce, FDI reached an annual record of $189 billion in 2022.

The most recent Ministry of Commerce data on FDI is available only in renminbi, after the government stopped publishing dollar-denominated monthly FDI figures in August. It also stopped publishing youth unemployment figures in July.

Brad Setzer, a senior fellow at the Council on Foreign Relations, said the data suggested that „foreign companies are no longer reinvesting in China.” Instead, he added, “they get [their] Profit out of the country as quickly as possible”.

Local governments, under pressure from an asset crunch and a legacy of bearing the costs of zero-covid policies, hailed foreign executives as they returned to China for the first time in years.

But visiting business representatives have kept a low profile amid deteriorating diplomatic ties with the US and calls for Western countries to „de-risk” supply chains.

Chinese regions that have historically benefited from foreign investment are now forced to seek alternative financing. A manufacturer in eastern Jiangsu province said companies rely on government funding to replace foreign investors.

Larry Hu, Macquarie’s chief China economist, said high interest rates in the US were the main driver of the FDI decline. That encouraged American companies to „reclaim” working capital from China, he said. Ten-year Treasury rates this week hit 5 percent for the first time since 2007, while Beijing has cut key lending rates in recent months.

“US yields continue to rise and China yields continue to [are] Flat-ish,” Hu added. „It creates a huge arbitrage opportunity.”

In a report this week, Goldman Sachs analysts pointed to concerns about „capital flight” while citing „contradictory signals.” According to Commerce Ministry data, the decline in FDI inflows is mainly due to „outflow of reinvested earnings,” they wrote.

They noted that the focus of FDI is also rotating as funding shifts from manufacturing to sectors including finance, information technology and scientific research. Compared to other major financial centers, Hong Kong’s foreign direct investment has increased, they added.

Logan Wright, head of China market research at Rhodium Group, said business data could be boosted by counting round-tripping as local companies send money to Hong Kong to benefit from incentives for foreign investors.

He added that the Commerce Ministry’s FDI and Balance of Payments data sets „indicate a broad trend of weak inflows” from foreign investors, and he also pointed to an alternative transaction-based approach to measuring foreign investment.

Data from Preqin, a research provider that tracks foreign funds raised by venture and private equity groups investing in China, shows such funds have raised just $5.7bn this year, a quarter of last year’s total and a fraction of the $48bn raised in 2021. .

There are signs of growing concern within China about the FDI drought. In celebration of Beijing’s $1tn Belt and Road global infrastructure initiative last week, President Xi Jinping said Beijing would lift restrictions on foreign investment in its manufacturing sector.

„China can only do well when the world is doing well,” he said. „When China does better, the world does better.”