In a notable economic shift, foreign businesses are withdrawing funds from China at a pace exceeding their investments, as revealed by official data. Concerns surrounding China’s decelerating economy, low interest rates, and geopolitical tensions with the United States have cast doubts on the country’s economic prospects. The third quarter of 2022 saw China experiencing a foreign investment deficit of $11.8 billion—the first occurrence since record-keeping commenced in 1998—indicating a trend where companies are opting to move profits out of China rather than reinvesting within.
The economic challenges facing China, including a discernible economic slowdown, are prompting businesses to explore alternative markets. Swiss industrial machinery manufacturer Oerlikon, which withdrew $277 million from China in the previous year, cited the need for corrections amid the economic downturn. While China remains a crucial market for Oerlikon, the company has proactively implemented measures to mitigate the impact of the economic slowdown.
Geopolitical tensions between China and the United States, marked by export restrictions and uncertainties, are also influencing businesses to reassess their investment strategies. Analysts note a heightened focus on diversification by companies as they navigate the evolving dynamics of the global market. The strict “zero-Covid” policy implemented by China during the pandemic has further complicated the landscape, disrupting supply chains and prompting some companies, like technology giant Apple, to diversify production to other countries.
Differences in interest rate policies add another layer to the situation. While many countries, including the United States and European nations, raised interest rates to address inflation, China lowered interest rates to support its economy. The resulting depreciation of the yuan against the dollar and euro has contributed to the complexity of the economic landscape.
Profit repatriation emerges as a notable trend, with businesses withdrawing profits from China as part of their long-term cycles or when their investments reach a specific scale and profitability. The European Union Chamber of Commerce highlights that companies with excess cash in China are increasingly transferring funds overseas, where higher investment returns are anticipated compared to investments within China.
Amidst the uncertainties, businesses are cautiously optimistic about the upcoming meeting between Chinese leader Xi Jinping and U.S. President Joe Biden. Direct meetings between the leaders have historically stabilised bilateral ties, contributing to a sense that both sides aim to establish a foundation for the relationship. However, analysts caution that until companies and investors perceive increased navigational certainty, the trend of reduced foreign investment into China may persist.
