Foreign direct investment in China slumps to 30-year low

SHANGHAI – Foreign businesses’ direct investment into China in 2023 has increased by the lowest amount since the early 1990s, underscoring challenges for the nation as Beijing seeks more overseas funds to help its economy.

China’s direct investment liabilities in its balance of payments stood at US$33 billion (S$44.4 billion) in 2023, according to data from the State Administration of Foreign Exchange (Safe) released on Feb 18. That measure of new foreign investment into the country – which records monetary flows connected to foreign-owned entities in China – was 82 per cent lower than the 2022 level and the lowest since 1993.

The data shows the effect of the Covid-19 lockdowns and a

weak recovery in 2023.

In a first since 1998, the investment fell in the third quarter of 2023, before recovering a bit to post growth in the final quarter.

Safe’s data, which gauges net flows, can reflect trends in foreign company profits, as well as changes in the size of their operations in China, according to economists. Profits of foreign industrial firms in China dropped 6.7 per cent in 2023 from 2022, according to the country’s National Bureau of Statistics data.

Earlier figures from China’s Ministry of Commerce (Mofcom) showed new foreign direct investment into the country fell in 2023 to the lowest level in three years. Mofcom’s figures do not include reinvested earnings of existing foreign firms and are less volatile than the Safe figures, economists have said.

The government’s efforts to get overseas companies to return after Covid-19 are falling short, and more will be needed if Beijing is to succeed in its aims. The continuing weakness highlights how foreign companies are pulling money out of the country due to geopolitical tensions and higher interest rates elsewhere.

There is more incentive for multinationals to keep cash overseas rather than in China, because advanced economies have been raising interest rates when Beijing has been cutting them to stimulate the economy. A recent survey of Japanese firms in China showed most of those companies cut investment or kept it flat in 2023, and a majority do not have a positive outlook for 2024.

Japanese companies added the least amount of net new money in 2023 in at least a decade, with only 2.2 per cent of new Japanese overseas investment going to China. That was less than what was channelled into Vietnam or India, and only about a quarter of the investment into Australia, according to Japanese government data released earlier this month.

Taiwanese firms have also become much more reluctant to add to their businesses in China, with new investment in 2023 the lowest since 2001, government data showed in January 2024. Taiwanese companies have traditionally been among the biggest investors in China but have been cutting new capital expenditure in the world’s second-largest economy since the peak in 2010.

South Korean firms also slashed investment into their close neighbour China in 2023, with new foreign direct investment dropping by 91 per cent in the first nine months of 2023 compared with the same period in 2022, dropping to the lowest level since 2002.

However, there are some bright spots. Direct investment into China by German companies reached a record of nearly €12 billion (S$17.4 billion) in 2023, according to a German Economic Institute report based on data from the Bundesbank.

That demonstrates an eagerness to expand in the world’s No. 2 economy even while the European Union steps up scrutiny of these investments because of security concerns. Investment in China as a share of Germany’s total direct investment abroad expanded to 10.3 per cent in 2023 – the highest since 2014, the report showed.
BLOOMBERG