Recent Developments Indicate More FDI Outflows than Inflows in China
China is experiencing a significant shift in its foreign direct investment (FDI) trends, witnessing more outflows than inflows for the first time since 1998. This development is attributed to escalating tensions with the United States over semiconductor technology and increased concerns about anti-spying activities, which are amplifying investment risks.
Key Highlights of the FDI Trend
- The State Administration of Foreign Exchange in China reported a negative FDI balance of USD 11.8 billion for the July-September quarter of 2023. This downturn in FDI is unprecedented since 1998 and is marked by increased withdrawals and downsizing rather than new investments.
- Foreign investment in China had already been sluggish, with a notable decline in the April-June quarter of 2022. This was largely due to the economic turmoil triggered by the zero-COVID lockdown in Shanghai.
- Surveys conducted by the Japanese Chamber of Commerce and Industry and the American Chamber of Commerce in China indicate that nearly half of the companies are hesitant to invest in China in 2023. Rising bilateral tensions with the US are cited as a significant business challenge by 66% of the American Chamber’s member respondents.
- In August, the US imposed stricter restrictions on investments in chip and artificial intelligence technologies in China. Despite diplomatic engagements, the US remains steadfast in its technology restrictions.
Implications on Global Investment Trends
- The Rhodium Group’s research shows a drastic reduction in China’s share of FDI from 48% in 2018 to just 1% in 2022. Conversely, the US’s share in the same sector surged from zero to 37% during the same period. Simultaneously, the combined FDI share of India, Singapore, and Malaysia increased from 10% to 38%, indicating a shift in global investment preferences.
- Several foreign companies are reevaluating their presence in China. For instance, Mitsubishi Motors recently announced its withdrawal from production in China. The growing emphasis on security by Chinese authorities is causing concern among foreign companies, potentially leading to a cautious approach towards investments in China.
Conclusion
The current FDI landscape in China marks a significant departure from previous trends. With increasing global economic complexities and geopolitical tensions, particularly with the US, the investment climate in China is undergoing notable changes. This shift is likely to have far-reaching implications for China’s economic growth and its position in the global economic order.
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