Deterioration of China's foreign investment in January prompts questions about potential recovery strategies for Beijing.
On a Wednesday report, the Ministry of Commerce announced a 13% decrease in foreign direct investment (FDI) usage, totalling 97.6 billion yuan ($13.4 billion), compared to the same period the previous year. This marked a weak start to the year, following a notable 27.1% drop in annual FDI to 826.3 billion yuan ($113.4 billion) in 2021, the lowest figure since 2016.
Vice Commerce Minister Ling Ji, speaking at a press conference, acknowledged the ongoing downward trend but noted a narrower decline compared to the previous year. Ling attributed the slump in foreign investment to various factors: a slow global economic recovery, increasing geopolitical tensions and protectionism, and shifts in multinational businesses' strategies affecting China's key sectors such as automotive, machinery, and apparel.
The unsatisfactory property sector, weighed down by economic growth and consumer spending, and fierce competition in sectors like automobiles and consumer products from national champions due to technological advancements and a growing patriotic sentiment, also played a role in the decrease.
China has consistently sought to attract foreign investment, which is crucial for economic growth. The government's response to the FDI decline includes a 20-point action plan to further open the economy, enhance regulatory support, and attract long-term investments in China's publicly listed firms. The plan involves expanding a pilot program for full foreign ownership in sectors like telecommunications, health care, and education, formulating new policies to encourage reinvestment by foreign enterprises within the country, and lifting restrictions on the use of domestic loans by foreign companies.
The exodus of foreign capital suggests growing economic problems in China, which may intensify as growth slows. US President Donald Trump's trade war and Tariff enactment of a 10% across-board on imports from China, along with Beijing's targeted economic responses, and the prospect of further trade negotiations at the negotiating table, continue to make the bilateral relationship uncertain.
Additionally, a survey by the American Chamber of Commerce in China revealed over half of US businesses expect worsening bilateral relations, with a record 30% considering or already moving operations out of China. The diversification of supply chains, accelerated by the Covid-19 global pandemic and influenced by rising political tensions and the detention of foreign executives and employees, has left China with less investment appeal.
- Overall, factors contributing to the decline in FDI include geopolitical tensions, changing investment strategies, economic challenges like high debt, housing slump, and a deflationary cycle, and a negative wealth effect from the real estate bubble.
- The Chinese government's measures to attract more foreign investment include the "Action Plan for Stabilizing Foreign Investment," encouraging equity investment, and optimizing rules and regulations to make it easier for multinational corporations to collaborate and invest in China.
- Despite the sluggish business environment, multinational corporations are still looking for effective tools to navigate China's economy, with strategies focusing on sectors less affected by geopolitical tensions and economic challenges.
- The Yuan's exchange rate, being a crucial factor in attracting foreign investment, has seen fluctuations in response to the global economy's recovery and shifting investment strategies, impacting the overall business climate.
- To combat the slump in foreign investment, China's toolbox includes fostering sectors that could prove resilient to geopolitical tensions, such as technology and e-commerce, together with strategic partnerships with multinational corporations in these domains.
