MNI: China Should Buoy Growth To Woo Hesitant FDI - Advisors

Warmer China-U.S. relations will not reverse the decline of foreign direct investment anytime soon, particularly in technology, and mainland authorities should pursue pro-growth policies to attract hesitant offshore capital especially as interest-rate spreads between the yuan and dollar remain wide, advisors told MNI.

Direct investment liabilities – a broad measure of FDI – reached minus USD11.8 billion in Q3, the metric's first-ever quarterly deficit, data published by the State Administration of Foreign Exchange showed in November. The negative result suggests foreign companies are likely pulling money from China instead of reinvesting. In Q3 2022, the measure stood at USD13.1 billion. Actual foreign capital used, or realised FDI, fell 9.4% y/y over the first 10 months, extending the decline noted since June, Ministry of Commerce data showed.

U.S. rate rises exacerbated the FDI downturn – Q1 2022 net investment inflow was the second highest on record before the Federal Reserve started hiking rates, said Cui Fan, professor of economics at the University of International Business and Economics. While higher U.S. bond yields remain attractive in the near term, foreign investors are hunting future investment opportunities, he said, pointing to a 32.1% y/y rise in the number of newly established foreign-invested enterprises between January and October.

DE-RISKING RISK

Wang Xiaosong, researcher at the National Academy of Development and Strategy, believes "de-risking" by Western countries could hamper FDI further. He noted U.S. investment in China decreased by 31.1% y/y in H1, with less than 10% directed to the tech sector. Japanese and South Korean investment also fell, while China continued to lose manufacturing to Southeast Asia due to rising costs.

French, Canadian and British Investment, however, rose by over 100% in the first nine months, mainly in retail sales, healthcare and finance, said Wang. But this failed to offset the decline in technology led by the U.S., with a near-term rebound unlikely, he added.

Wang believes the growth rate of actual foreign capital use will turn positive next year should China-U.S. relations remain stable and the economy grows at 5% as expected.

SHIFTING INVESTMENT

The proportion of FDI directed to manufacturing declined to 19% in 2021 from 71% in 2004, while investment in services, excluding real estate, rose to 61%, according to Shen Jianguang, adjunct professor at Fudan University. The shift represents the changed view among foreign investors that increasingly consider China a consumer-driven market over a manufacturing base, he added.

Greenfield investment, an important driver of GDP and employment, fell to a multi-year low of USD18 billion in 2022 from USD32 billion in 2021, according to data from the UN Conference on Trade and Development.

Shen called for greater efforts to attract manufacturing investment by strengthening intellectual property protection and promote fair supervision with more internationalised rules and standards, following President Xi Jinping's pledge last month to remove all restrictions on FDI in the sector.

Shen added the central government should increase spending on infrastructure construction and social security for low-income groups to ensure stable growth. Authorities should also help stabilise the real-estate sector by easing restrictions for buyers and increasing liquidity to developers, he noted. (See: MNI: China Likely To Ease Developer Borrowing Restrictions)