WeChat Official Account: Ni Ren Black Noise
The data released by the State Administration of Foreign Exchange of China on August 9th shows that the direct investment of foreign-funded enterprises has experienced negative growth for the first time in the past three quarters. Foreign companies' direct investment in China has decreased by $14.8 billion.
This data not only represents negative growth, but also the lowest in history since the availability of statistical data.
In fact, the sharp decline in foreign direct investment has been a trend for a long time.
According to data released by the State Administration of Foreign Exchange on February 18, 2024, in 2023, China's foreign direct investment (FDI) net inflow (i.e., direct investment liabilities, also known as FDI into China) was $33 billion, a decrease of 47.6% compared to the previous year, and a further decrease of 81.7%, with the net inflow scale dropping to the lowest level since 1994.
It is worth noting that the foreign shareholder loans in foreign direct investment in 2023 changed from a net inflow of $20.5 billion in the previous year to a net outflow of $29.1 billion, marking the first annual net outflow since data became available in 1982.
In the detailed data of foreign direct investment from April to June this year, the outflow of funds for factory construction and mergers and acquisitions (M&A) exceeded the inflow.
From these two pieces of data, it can be seen that the sharp decline in foreign investment in new enterprises and new factories in mainland China is an important reason for the decrease in foreign investment.
Considering the cyclical fluctuations in domestic and foreign market demand, the cycle of US dollar interest rate hikes, and the combined impact of the loose monetary policy of the renminbi, foreign-funded enterprises have a large amount of retained earnings repatriation, which is also one of the direct reasons for the sharp decline in this data.
Some people also say that the reason for the sharp decline in foreign investment is that foreign companies cannot compete with the booming domestic companies, leading to a decline in overall profits. However, according to data from the National Bureau of Statistics, the total profits of foreign-invested enterprises and Hong Kong, Macao, and Taiwan-invested enterprises in industrial enterprises above a certain scale decreased by 6.7% compared to the previous year in 2023. Therefore, this decline is not enough to explain the 81.7% year-on-year decline in foreign investment in 2023.
Another explanation is that the surge in investment in China caused by the epidemic has exhausted the growth space, and the current decline is just a natural cyclical decline, which does not need to be worried about.
So let's take a look at the data:
In 2020, due to the global economic slowdown caused by the COVID-19 pandemic, net inflows of foreign direct investment in China increased by 35% according to the balance of payments. In 2021, net inflows of foreign direct investment in China increased by 36% according to the balance of payments. These two years did indeed see significant growth.
But as I mentioned earlier, starting from 2022, net inflows of foreign direct investment in China began to decline, with a decrease of 47.6%. In 2023, the year-on-year decline reached a staggering 81.7%. From April to June 2024, there was even negative growth, with a decrease of $14.8 billion.
In fact, the first occurrence of negative growth in this data was not this year, but a decrease of $12.1 billion in July-September 2023.
From the above data, although factors such as cyclical factors in overseas demand, US dollar interest rate hikes, and the interest rate differential between China and the US are all reasons for capital outflows, they are not enough to explain the depth of the current decline, let alone the occurrence of negative growth.
If it is a normal cyclical decline, it should at most decline to the average level around 2008, but now it has directly fallen to the level of the early 1990s, so we must seriously consider the reasons behind it.
I think the lack of economic confidence and geopolitical factors are the real reasons for capital outflows.
The lack of confidence has made foreign investors uncertain about the prospects of investing in China, especially the potential risks caused by the downturn in the real estate market and domestic demand, which has made foreign investors hesitate.
In comparison, countries such as India and Mexico have become new targets for foreign investment.
In addition to the decrease in investment caused by the US advocating a shift from "far packaging" to "near packaging," how have China's East Asian neighbors, who have always invested heavily in China, performed in the past two years?
According to a survey, most Japanese companies have reduced or maintained their investment in China, and most companies are not optimistic about the prospects for 2024.
Japanese investment in China last year was the lowest in ten years, with only 2.2% of Japan's overseas new investment flowing into mainland China. This number is even lower than the investment in Vietnam or India and is only equivalent to one-fourth of the investment in Australia.
Korean investment in China is also decreasing. The newly added foreign direct investment in the first nine months of 2023 compared to the same period in 2022 has decreased by as much as 91%, reaching the lowest level since 2002.
Under the downturn, the only bright spot comes from the European Union. In 2023, the proportion of German investment in China to Germany's total overseas direct investment reached 10.3%, the highest since 2014.
But this trend is clearly related to industrial trends. In the field of new energy vehicles, Germany hopes to maintain close cooperation with China. For example, BMW has increased its investment in Shenyang by hundreds of billions of RMB this year, and Volkswagen has also made several billion euros of new energy vehicle investments in China this year.
But this is entirely for "self-rescue." In order to promote the transformation of new energy vehicle technology and avoid being completely replaced by companies like BYD, German car companies urgently need to cooperate with Chinese companies to improve their technological iteration capabilities and intelligence levels.
It should be noted that Europe's attitude towards electric vehicles is beginning to cool. The postponement and hesitation of the ban on fuel vehicles reflect Europe's complex feelings about this strategy.
So will German car companies continue to increase their investment in China in the future? This is doubtful.
In addition, the increase in investment in one industry is only a small factor in the overall decline in foreign investment in China.
Overall, although we should not be overly pessimistic about the sharp decline in foreign investment in China, we must fully recognize that the economic downturn and the cooling of global geopolitics (especially the impact of the Russia-Ukraine war) have indeed affected foreign investors' confidence in investing in China.
Under the trend of sluggish domestic demand, if foreign investment continues to cool down, it will not be a good thing.
This article is compiled from mainstream financial media and official data.