Foreign Direct Investment in China Hits 30-Year Low

Last year saw a significant slowdown in foreign businesses' direct investment into China, marking the lowest increase since the early 1990s. This decline underscores the challenges facing the nation as it seeks to attract more overseas investment to bolster its economy. According to data released by the State Administration of Foreign Exchange on Sunday, China's direct investment liabilities in its balance of payments surged by $33 billion last year, a staggering 82% drop compared to 2022. This key measure, which tracks monetary flows associated with foreign-owned entities in China, plummeted to its lowest level since 1993.

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The data points to the lingering effects of Covid lockdowns and a sluggish recovery throughout the past year. Investment took a hit in the third quarter of 2023, marking the first decline since 1998. Although there was a modest recovery leading into the final quarter, the $17.5 billion influx during that period was still one-third lower than the corresponding period in 2022.

Economists note that the data from the State Administration of Foreign Exchange, which assesses net flows, can indicate shifts in foreign company profits and changes in the scale of their operations within China. According to data from the National Bureau of Statistics, profits of foreign industrial firms in China dipped by 6.7% last year compared to the previous year.

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Earlier statistics from the Ministry of Commerce revealed a decline in new foreign direct investment into China last year, marking the lowest level in three years. Unlike the figures from the State Administration of Foreign Exchange, the Ministry of Commerce's data excludes reinvested earnings of existing foreign firms and tends to be less volatile.

The ongoing weakness underscores how geopolitical tensions and higher interest rates in other regions are prompting foreign companies to withdraw funds from China. With advanced economies increasing interest rates while Beijing implements cuts to stimulate its economy, multinational corporations are finding it more attractive to maintain funds overseas rather than within China. A recent survey of Japanese firms operating in China indicated that most either reduced investment or maintained it at the same level last year, with a majority expressing pessimism about the outlook for 2024.

Efforts by the government to encourage the return of overseas companies post-Covid are falling short, indicating a need for more robust measures if Beijing is to achieve its objectives.

Despite these challenges, there are some positive developments. Direct investment in China by German companies reached a record high of nearly €12 billion ($13 billion) last year, according to a report from the German Economic Institute based on Bundesbank data. This underscores a strong desire to expand within the world's second-largest economy, even as the European Union intensifies scrutiny of such investments due to security concerns. Investment in China as a percentage of Germany's total direct investment abroad expanded to 10.3% last year, the highest level since 2014, according to the report.

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