FDI capital decreased sharply, putting pressure on the Chinese economy

          Foreign direct investment (FDI) into China is falling sharply, increasing pressure on Beijing and local governments amid an economic slowdown.

According to calculations by the Financial Times newspaper based on data from the Chinese Ministry of Commerce, FDI capital into China decreased by 34% in September this year compared to the same period last year, to 72.8 billion yuan, equivalent to 10 billion USD. This is the sharpest decrease in FDI inflows into the country since at least 2014.

Falling FDI capital is one reason for a string of disappointing data on the Chinese economy since the country lifted anti-Covid-19 restrictions earlier this year. In January, FDI capital into China increased by 15% over the same period last year. But since May until now, every month has recorded a double-digit decrease in FDI capital flows into the world's second largest economy.

Data on China's balance of payments also shows a worsening picture of foreign investment. Direct investment obligations - a measure of foreign capital in China - were $6.7 billion in the second quarter of this year, the lowest since 2000 and down sharply from the first quarter's figure of $21 billion.

The recent decline in FDI inflows into China is in stark contrast to the boom recorded during the Covid-19 pandemic, even though that was during the time the country was closed to fight the epidemic. In 2022, FDI capital into China sets a full-year record at 189 billion USD.

Senior expert Brad Setser of the Council on Foreign Relations (CFR) in Washington DC commented that the above FDI figures show that "foreign companies are no longer reinvesting in China", but instead These businesses “are withdrawing profits from China as quickly as possible.”

Chinese localities - while facing the real estate crisis and the economic consequences due to the costs of fighting the epidemic - are trying to attract foreign businesses to invest capital. However, this effort is facing obstacles due to the deterioration of US-China relations and calls from Western countries to "de-risk" in the supply chain.

In such a context, localities that have benefited from foreign investment for many years are now forced to look for alternative sources of capital. A manufacturing enterprise in Jiangsu province said companies in this province are having to rely on capital from the government to replace capital from foreign investors.

Macquarie chief economist Larry Hu said that a main reason for the decline in FDI capital flows into China is that high interest rates in the US encourage US businesses to repatriate capital. Recently, the 10-year US Treasury bond yield exceeded 5% for the first time since 2007, while China is in the process of loosening operating interest rates to revive the economy.

“Interest rates in the US are continuing to rise, while interest rates in China are almost flat. This creates an opportunity to trade for differences,” Mr. Hu said.

Chinese leaders have begun to show signs of concern about the decline in FDI flows. At the recent Belt and Road forum, Chinese President Xi Jinping said the country would lift restrictions on foreign investment in the manufacturing sector.

“China can only do well when the world does well. When China does well, the world will be even better,” Mr. Xi said.

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