China has seen an outflow of foreign investment at home and an increase in its own external investment so far this year during its trade war against the United States and Europe.
China’s direct investment liabilities, an indicator of incoming foreign investment, fell by US$14.8 billion in the second quarter of this year, according to the latest data released by the State Administration of Foreign Exchange (SAFE).
The figure was down US$4.5 billion for the first six months. Bloomberg said if the decline continues in the second half of this year, it would be the first annual net outflow of foreign investment from China since 1990, when comparable data begins.
In the third quarter of 2023, China’s director investment liabilities fell US$11.8 billion, the first decline in decades. For the whole year of 2023, the figure increased by US$33 billion. The gain was down by 82% from the level in 2022, and it was the lowest since 1993.
In recent years, the US has encouraged its companies to implement a “China plus one” or friend-shoring strategy to avoid investing only in China and diversify business into other countries. The European Union since last year has also initiated anti-subsidy probes on imported Chinese electric vehicles and clean energy products.
Due to these changes, some foreign firms decided to cut investments in China and leave the country. Some Chinese manufacturers started building factories in Europe to try to avoid potential tariffs.
In the first half of this year, China’s foreign direct investment (FDI) fell 29.1% to 498.9 billion yuan (US$69.5 billion) from the same period of last year, the Ministry of Commerce said last month. The country’s overseas direct investment (ODI) increased 16.6% to US$72.62 billion.
“Some foreign investors have recently reduced their investments in China or even left the country as they were affected by the ideology of de-globalization, as well as the de-Sinicization campaign promoted by the United States,” Mao Zhenhua, the founder and president of China Chengxin Credit Management Company and the co-director of Renmin university’s Economic Research Institute, says in an article published on Monday.
He says that, despite the trend, foreign investors’ role in China has remained the same because the country still needs to rely on the West to bring in high technologies.
“There are some opinions in the society that people who work for foreign firms or buy foreign goods are not patriots,” he says. “There are also some views that mistakenly interpret China’s exports as a favor to other countries, especially to the US.”
He says people with these views should correct themselves and understand that China’s trade with other countries is done according to the mutual-benefit principle. He says China should be friendly to customers from all countries and provide a good business environment to foreign companies.
Besides, he says, Chinese companies should not be criticized for investing in foreign countries as many of them need to build their overseas production capacity, either to cut costs or to avoid new tariffs irrationally imposed by western countries.
He says Chinese firms’ overseas investment can help strengthen China’s supply chain and stabilize the Chinese economy over the long run.
Chinese workers in pain
An unnamed spokesperson of the Ministry of Commerce said on July 13 that it is natural that FDI declined in 2023 as the figure had kept growing annually for a decade between 2013 and 2022.
The spokesperson said China will further open up to attract more foreign investors.
“For some time, some Western media have hyped the theory of ‘foreign capital leaving China’ but their misleading reports ignored the fact that the structure of foreign investment in China is constantly being optimized,” Guan Tao, chief economist with Bank of China International Holdings Co, says in a commentary published on July 18.
Many Chinese skilled workers who were made redundant have been unable to find relevant jobs and have had to become food deliverers.
Guan says the proportion of foreign investment in China’s high technology manufacturing sector to overall FDI has continued to grow so far this year.
Citing UN Trade and Development’s World Investment Report 2024, he points out that global FDI actually can be shown to have declined by more than 10% last year if the large swings in investments flows in a few European conduit economies are excluded.
He says China’s State Council has already unveiled new measures in March and June to boost the FDI and the effect of these measures will be seen very soon.
“Over the last two years many foreign firms have left China, but experts and officials tended to say that it did not have much impact on the economy,” a Shaanxi-based columnist called Mingcheng says in an article published on August 6. “But in fact, it’s getting more and more difficult for grassroots to make ends meet.”
He says foreign technology giants continue to be global market leaders after they relocate their manufacturing facilities from China to Vietnam and India or withdraw their high-technology divisions back to their original countries.
However, he says many Chinese skilled workers who were made redundant have been unable to find relevant jobs and have had to become food deliverers.
He says some Chinese firms will enjoy more market shares in China after foreign firms leave but they will then have less incentive to improve their products or increase their competitiveness.
Read: Beijing highlights self-reliance at Third Plenum
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