MNI: China FDI Outlook Down As Economy Weakens - Chambers

Recent government measures that address intellectual property and market access concerns may prove ineffective at boosting foreign direct investment (FDI), as international corporations operating in Mainland China grow increasingly worried over the country's economy and lack of policy response, international business leaders in China have told MNI.

Foreign corporations say the economic outlook now tops their list of concerns and falling FDI, which has dropped to record low levels, could suffer further irreversible declines.

Overseas firms operating in China have seen profits fall by 12.4% y/y between Jan-July, according to official data released on Sunday. This followed an 87% y/y FDI fall in Q2 to USD4.9 billion, according to the State Administration of Foreign Exchange.

China’s weak recovery added to the already high level of uncertainty foreign firms faced, said Jens Eskelund, president at the European Chamber of Commerce in China, and Maersk’s chief representative for Greater China. He noted the business community was increasingly worried about China’s macroeconomic direction, alongside geopolitics and supply chain concerns, and this had weighed on FDI. Eskelund cautioned, however, that the recent weak FDI data likely reflected the pandemic years due to a one-two year lag between boardroom decisions and implementation, so the real impact on FDI was not yet known.

Authorities in China have struggled to regain economic momentum this year, with fixed-asset investment in the Jan-July period up 3.4% y/y, the lowest level since December 2020. Retail sales recorded their lowest 2023 level at 2.5% y/y in July, weaker than the expected 3.8% and June's 3.1% gain.

Policymakers have unveiled measures to boost the economy in recent weeks, including plans to revitalise the equity and property markets, but have resisted large scale intervention. Policy advisors say the government remains focused on the weakening yuan and local government debt (See MNI PBOC WATCH: Stable 5-Yr LPR Fuels Bet On Property Stimulus - Bonds & Currency News | Market News)

A partner at an international law firm based in Beijing who requested anonymity told MNI the slowdown was accelerating the exit of weaker foreign firms. “But those with good fundamentals and national strategic alignment are still willing to keep going,” he said.

OPEN BUT CLOSED

The Chinese government softened its rhetoric towards foreign firms following July’s politburo meeting, which called for more stable FDI. The State Council followed with a 24-point plan which included tax breaks and equal access to public procurement for overseas firms, while the Ministry of Commerce recently held roundtable discussions with executives from 80 foreign companies in China.

“The 24-point plan is a welcome development and shows the leadership is listening, we now wait to see how lower government tiers implement the measures before deciding how effective they will be,” said Alexandra Hirst, policy and advocacy manager at the British Chamber of Commerce in China.

The government's FDI friendly shift, however, followed a nationwide national security investigation into international consulting firms that included Bain, Capvision and Mintz, which rattled the international business community.

“Recent warming measures increase confidence, but how much do they reduce business risk our members face and to what extent – this remains to be seen,” Hirst noted.

Eskelund added the inconsistent lurch between pro-business rhetoric and national security policies confused the international community. “This creates an atmosphere of insecurity and ambiguity which is toxic for business,” he said. “Our members love certainty.”

U.S. Commerce Secretary Gina Raimondo, who is in Beijing this week, reportedly told journalists on Tuesday U.S. companies had raised concerns with her over high levels of business risk in China following recent fines and raids.