China grapples with an ongoing challenge in its endeavor to entice foreign investors back within its borders. Recent data illustrates a prevailing trend of more outbound direct investments from the country than inbound investments. This suggests that corporations may be actively diversifying their supply chains to mitigate potential risks.
Over the past two years, direct investment liabilities within China’s balance of payments have been on a steady decline. Following a peak valuation of over $101 billion in the first quarter of 2022, this metric has witnessed consecutive quarterly deteriorations. The most recent data, covering the period from July to September, revealed a significant decline of $11.8 billion. This marks the first instance of contraction in this metric since its inception in 1998.
Regional Head of Research for Asia-Pacific at ING Groep NV, Robert Carnell, expressed his concerns over the increasing net outflows at a time when China is diligently striving to attract fresh investments, particularly in the manufacturing sector. Carnell speculates that this could signify a growing inclination among investors to explore alternatives to China for their investment endeavors.
Despite recent efforts by the Chinese government to allure foreign investments back, including meetings with international corporate leaders and promises of improved tax incentives and visa facilitation, skepticism remains pervasive. Foreign businesses are experiencing what they term as “promise fatigue,” as doubts persist regarding the actualization of meaningful policy support. Moreover, the prevailing interest rate differentials between China and the United States are incentivizing companies to repatriate earnings overseas in search of more lucrative returns.
Foreign Direct Investment (FDI) outflows are now placing additional stress on the onshore yuan, which reached its weakest level since 2007 earlier this year. Furthermore, the Chinese 10-year government bond yield currently trades 191 basis points below that of comparable US Treasuries. This stark contrast, compared to an average premium of approximately 100 basis points over the past decade, is influencing investment decisions.
The trend of “decoupling” or “derisking” from China, identified as a leading factor behind the declining FDI figures reported by the State Administration of Foreign Exchange, is supported by Louis Kuijs, Chief Economist for Asia Pacific at S&P Global Ratings. Concerns over geopolitical issues and US-China relations were cited as primary reasons for foreign corporate reservations, as revealed in a recent survey by the American Chamber of Commerce in Shanghai.
Companies are increasingly considering other regional destinations for their supply chain shifts, with Japan, India, and Vietnam emerging as top choices, as indicated in surveys conducted by UBS Group AG and AmCham. Geopolitical concerns, rising manufacturing costs, and regulatory challenges in China have all contributed to the reluctance of foreign investors.
While foreign companies constitute less than 3% of the total corporate entities in China, they significantly contribute to its trade volume, tax revenue, and urban employment. Additionally, foreign investments have been instrumental in fostering China’s technological development, with high-tech industry investments growing at double-digit rates on average since 2012.
“The decline in trade and investment links with advanced economies will have a substantial impact on a growing economy like China. It will weigh on productivity growth and technological advancements,” explained Kuijs.
Nonetheless, optimism is not entirely elusive. An upcoming meeting between President Joe Biden and his Chinese counterpart, Xi Jinping, on the sidelines of the Asia-Pacific Economic Cooperation summit in San Francisco may help stabilize bilateral ties, offering a glimmer of hope for improved communication. Yet, it remains doubtful whether the United States will significantly alter its policy stance.
Economists also propose that FDI trends may stabilize once the yield differential between China and the US narrows. They point to data published by the Ministry of Commerce, which suggests that FDI utilization fell by 8.4% in the first nine months of this year compared to the same period in 2022.
Despite these considerations, China’s commitment to create a more inviting investment environment remains crucial. A stable and conducive policy framework will be pivotal in attracting foreign investments, by mitigating the effects of national security-related measures on the economy and investor sentiment.
Source: Bloomberg
