For three decades, the story of the global economy has revolved around one key plot point: the metamorphosis of China into a modern-day Eldorado. Toe the line, the conventional wisdom went, and riches awaited.
Now, suddenly, the tide has turned. After almost seven years of a consistent rainfall of money, companies are pulling capital out of the country. Over the last six months, foreign direct investment into China has gone negative.
Jens Nordvig, the former senior global markets economist at Goldman Sachs and one of the most sought-after voices on Wall Street, called out the reversal on Twitter while claiming that it “is not getting enough attention.”
The shift comes even after China attracted hundreds of billions of dollars from foreign companies throughout the height of the pandemic, according to data from Nordvig’s company Exante Data.
Nordvig said the last time foreign investments were negative was in 2016, “but back then it was because China saw a ‘boom in outflows’ with big outbound M&A, which has since been shut down. The inflows have never been this weak.”
You don’t have to think too hard about what’s changed since then.
China’s Zero-Covid policy has meant the country’s economy is operating in fits and starts, like a teenager learning to drive a stick. Rising geopolitical tensions may have hit a tipping point — and that’s even before Chinese balloons began touring America. And companies are looking to diversify their supply chains — in other words, figuring out how not to be totally dependent on Chinese manufacturing — after the pandemic made them realize that resilience is every bit as important as efficiency.
That could mean that companies are less worried now about making money in China and more focused on making sure they can get their money out before it’s too late.
Multinational corporations “investing in China may be getting more concerned about return *of* capital than return *on* capital,” Matthew Pines, director of intelligence at cybersecurity firm Krebs Stamos Group, tweeted in reply to Nordvig.
The shift in foreign direct investment is important for China, but it also has major implications for the future of globalization and inflation trends, according to Nordvig. Moving factories out of the country will come at a cost, and that will almost assuredly be passed on to consumers. And there’s no guarantees that Vietnam, India or anyone else will be able to match China’s low, low prices.
“China is reopening, and growth is coming back, that is clear,” Nordvig tweeted. “But a lot of things have changed under the surface, and not everything may normalize the same way. I will leave it at that.”
Companies are being raided and employees detained. The CCP is clearly more interested in control than growth. This has directly influenced foreign investment because of Chinese efforts to close and otherwise harass companies that undertake due diligence services for foreign investors.
“Despite the decline this year, it is still at the third highest level in the past 10 years,” the ministry said. In 2023, foreign investment in the world's second largest economy dropped 8.0% from the previous year in yuan terms.
The Situation: The Negative List is a list of industries for which foreign investment in China is either prohibited, or subject to greater scrutiny and restrictions.
China's improvements in productivity could slow down if foreign corporations continue to pull out or scale down their operations there. This, along with the shrinking of the labor force, could hurt China's economic growth over the medium to long term.
According to the Ministry of Commerce (MOFCOM), foreign invested enterprises account for over half of China's exports and imports; they provide for 30% of Chinese industrial output, and generate 22% of industrial profits while employing only 10% of labor – because of their high productivity.
In recent years, China has been the second largest recipient of foreign direct investments (FDI) worldwide, attracting approximately 189 billion U.S. dollars in 2022.
Its economy has become weighed down by spiraling government and commercial debt, a ticking time bomb that finance experts fear could have reverberating effects across the global economy. That, in turn, is fueling economic unease internally, dampening consumer spending as well as hiring and business investment.
What are some of the drawbacks of investing in China? One of the key risks of investing in China is the regulatory environment. The Chinese government introduced a raft of heavy-duty regulations against technology firms in 2020, amid concerns over their influence.
China's law prohibits nationalization of FIEs, except under vaguely specified “special circ*mstances” where there is a national security or public interest need. PRC law requires fair compensation for an expropriated foreign investment but does not detail the method used to assess the value of the investment.
The counterintelligence and economic espionage efforts emanating from the government of China and the Chinese Communist Party are a grave threat to the economic well-being and democratic values of the United States. Confronting this threat is the FBI's top counterintelligence priority.
Although the Republican Party and Democratic Party have serious differences and conflicts in domestic affairs, they both agree that China poses a threat to the United States' military, economic, and intellectual property rights.
China is punishing citizens who can't repay their debts by cutting off access to social services. So-called deadbeat debtors are blacklisted, facing travel restrictions and government jobs. The blacklist is similar to the country's "social credit" system that punishes undesirable behavior.
Such less than friendly policies, even if far short of open conflict, raise uncertainties and risks and make China a less attractive place for foreigners to do business. Adding to businesses' concerns is Beijing's increased belligerence toward Taiwan and its stepped-up surveillance of foreign firms operating in China.
NET foreign direct investment (FDI) into the Chinese mainland plummeted to a 23-year low last year, government data showed on Friday (Mar 29). The US$42.7 billion inflow is less than a quarter of that seen in 2022.
China foreign direct investment for 2022 was $180.17B, a 47.64% decline from 2021. China foreign direct investment for 2021 was $344.07B, a 35.95% increase from 2020. China foreign direct investment for 2020 was $253.10B, a 35.22% increase from 2019.
China will struggle with a weakening in the three pillars of growth up to now — the property market, infrastructure and exports, she said. A lack of clarity on China's policymaking, along with patchy economic data, add to concerns about investing there, Mossavar-Rahmani said.
China's a hotspot for investors because: Growth: It's booming with a huge market and urbanization. Size: Massive consumer base means big opportunities. Government Support: Policies promote innovation and investment.
Foreign businesses have been pulling money out of China at a faster rate than they have been putting it in, official data shows. The country's slowing economy, low interest rates and a geopolitical tussle with the US have sparked doubt about its economic potential.
Introduction: My name is Trent Wehner, I am a talented, brainy, zealous, light, funny, gleaming, attractive person who loves writing and wants to share my knowledge and understanding with you.
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