China has record foreign investment outflow as US$168 billion exit
Staunching the outflow of capital will be a challenge after China and the US started another round of the trade war that could embroil more companies.
CHINA saw record outflows of foreign direct investment (FDI) last year, an exodus that threatens to persist after the resumption of a trade war with the US.
Net FDI dropped by US$168 billion in 2024, according to the State Administration of Foreign Exchange, the biggest capital flight in data going back to 1990. Foreign investment into China has slumped in recent years after hitting a historical high of US$344 billion in 2021.
International companies have been pulling back just as domestic firms also rapidly moved money abroad. Chinese investors sent US$173 billion overseas, while foreign investors only channelled US$4.5 billion into the country, the lowest amount since 1992.
Staunching the outflow of capital will be a challenge after China and the US started another round of the trade war that could embroil more companies.
President Donald Trump has imposed 10 per cent tariffs on all Chinese products, while China has hit back by retaliating in a number of areas, including a probe into Google and a blacklisting of Calvin Klein owner PVH Corp. The Wall Street Journal reported that China is also considering investigating Apple, Broadcom, and Synopsys.
Sentiment sours
The slowdown in China’s economy and rising geopolitical tensions have already led some companies to reduce their exposure. At the same time, the abrupt shift to electric vehicles in China also caught foreign car producers off guard, prompting some to withdraw or scale back their investments.
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SAFE’s data, which tracks net flows, can reflect trends in foreign company profits, as well as changes in the size of their operations in China. Beijing has cut interest rates well below most developed nations to stimulate the economy, giving multinationals more reason to keep cash outside China and resulting in a repatriation of funds that’s likely masking some new investments.
While there was a net drop of almost US$13 billion in the amount of FDI liabilities in the first three quarters of last year, new inbound capital investment reach almost US$20 billion, according to a statement released by SAFE late last year.
That suggests the overall fall in the amount foreign firms have invested in China is mostly driven by such factors as debt repayment and profit repatriation. SAFE has also pointed to these factors to explain the drop-off in investments, according to a local media report last year.
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In response to the decline over the past few years, Beijing has been courting foreign investors, including promising better treatment, extending tax breaks and granting visa waivers. A Cabinet meeting recently adopted an action plan to attract more foreign investment.
Global slump
The drop-off in sentiment towards the world’s second-largest economy was also laid bare in a report from the United Nations, which reported a 29 per cent drop in foreign direct investment into China last year. That compares with a 2 per cent fall for developing nations and an 8 per cent drop globally, excluding flows through some European “conduit economies,” the UN Conference on Trade and Development said in its report.
The increasing wariness of Japanese companies to commit new funds to China is emblematic of the problems facing Beijing as it tries to attract more foreign money. Firms from Japan were among the first to expand into China after its opening up began in the late 1970s, and they are still the single largest foreign investors.
But the amount of new money they invested last year was flat from 2023’s low, according to data out earlier this month. And even with big new deals such as Toyota Motor’s US$700 million plant to build Lexus electric vehicles in Shanghai, the trend looks likely to deteriorate further.
Almost half of Japanese companies in China said they would cut investments this year or not bring in any new money, according to the results of a recent survey by the Japanese Chamber of Commerce and Industry in China.
Such an attitude is at odds with corporate eagerness to channel money into the US, with the value of new investment by Japanese firms there soaring to a record 11.7 trillion yen (S$101 billion) last year, according to data released by Japan’s Ministry of Finance.
In contrast, some portfolio investors have been adding to their holdings in China more recently. The mood in the market has improved thanks to a rally in bond prices and the almost 25 per cent rise in mainland stocks since the low point in mid-September, before the central government announced economic stimulus plans.
For the whole year, the current-account surplus was US$422 billion, the second-highest ever, boosted by a record US$181 billion surge in the final quarter.
The main factor behind the increase was an unprecedented US$768 billion goods trade surplus. The vast difference between Chinese exports and imports is becoming a international issue, with the US and some other countries increasingly unhappy with the unbalanced nature of global trade. BLOOMBERG
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