Bloomberg: China’s foreign direct investment hits lowest level since 1990s

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19th February 2024 – (Beijing) According to Bloomberg, foreign businesses’ direct investment into China experienced its smallest increase since the early 1990s, indicating challenges for the nation as Beijing aims to attract more overseas funds to support its economy. According to data released by the State Administration of Foreign Exchange (SAFE) on Sunday, China’s direct investment liabilities in its balance of payments amounted to $33 billion last year. This measure, which records monetary flows related to foreign-owned entities in China, was 82% lower than the 2022 level and marked the lowest figure since 1993.

The data reflects the impact of Covid lockdowns and a sluggish recovery in the previous year. Notably, investment declined in the third quarter of 2023, the first such decline since 1998, before showing slight growth in the final quarter.

Economists suggest that SAFE’s data, which reflects net flows, can indicate trends in foreign company profits and changes in the scale of their operations in China. Statistics from the National Bureau of Statistics reveal that profits of foreign industrial firms in China dropped by 6.7% last year compared to the previous year.

Earlier figures from the Ministry of Commerce (MOFCOM) indicated that new foreign direct investment into China reached its lowest level in three years. However, MOFCOM’s figures do not include reinvested earnings of existing foreign firms and are considered less volatile than the data provided by SAFE, according to economists.

Efforts by the Chinese government to attract overseas companies back to the country after the pandemic have fallen short, highlighting the need for additional measures to achieve Beijing’s objectives. The persistent decline underscores how geopolitical tensions and higher interest rates in other countries are prompting foreign companies to withdraw capital from China.

Multinationals have greater incentive to keep their cash overseas rather than investing in China, as advanced economies have been raising interest rates while Beijing has been reducing them to stimulate its economy. A recent survey of Japanese firms operating in China revealed that most of these companies either reduced investment or maintained it at the same level in the past year, with a majority expressing a pessimistic outlook for 2024.

Japanese companies allocated the smallest amount of net new investment to China in at least a decade, with only 2.2% of new Japanese overseas investment flowing into the mainland. This figure was lower than the investment directed towards Vietnam or India, and only about a quarter of the investment into Australia, according to data released by the Japanese government this month.

Taiwanese firms have also become increasingly hesitant to expand their businesses in China, with new investment in 2023 reaching its lowest point since 2001, as indicated by government data released last month. Taiwanese companies have historically been among the largest investors in China but have been reducing new capital expenditure in the world’s second-largest economy since the peak in 2010.

South Korean firms likewise slashed their investment in their neighbouring country, with new Foreign Direct Investment (FDI) dropping by 91% in the first nine months of 2023 compared to the same period in 2022. This decline brought FDI to its lowest level since 2002.

Despite these challenges, there are some positive developments. Direct investment into China by German companies reached a record-high of nearly €12 billion ($13 billion) last year, according to a report by the German Economic Institute based on Bundesbank data. This demonstrates a strong desire to expand in the world’s second-largest economy, even as the European Union intensifies scrutiny of such investments due to security concerns. The report also revealed that investment in China accounted for 10.3% of Germany’s total direct investment abroad last year, the highest proportion since 2014.