My Take | China’s first deficit in foreign investment should serve as a warning for Beijing amid efforts to attract business
- Even after its first foreign investment deficit, China remains an attractive market for many firms, but bureaucrats need to do more to attract business
- Moderna’s deal with Shanghai and Micron’s appearance at a trade fair show US de-risking efforts have limits
As a small item on China’s quarterly balance sheet for international payments, direct investment liabilities typically does not attract much attention. But it grabbed headlines this month when it fell into the red – the first time China has recorded an investment deficit since the data started being recorded in 1998.
Analysts cited the deficit of US$11.8 billion for the third quarter as a sign of battered foreign investor confidence in the world’s second largest economy. A deficit means money from investors is leaving the country through ways that include repatriating profits to head offices outside China instead of reinvesting in domestic operations. In a broad sense, this suggests that de-risking efforts by the US and its allies are starting to have an effect, possibly weakening China’s economic standing.
This is not a welcome sign for China. Beijing has been playing down talk of capital flight, and the Ministry of Commerce highlighted the fact that China remains a magnet for global investors with foreign direct investment (FDI) flows reaching an “all time high” of 1 trillion yuan (US$137.3 billion) in the first nine months of the year.
Given the size of the Chinese economy, it is always possible to find data, anecdotes and other types of evidence to justify any particular narrative about the country’s relationship with the world. Anyone wanting to argue that China is being dumped by multinationals will find solid data to support that view, but it is also not hard to find evidence of China remaining a key FDI destination.
China has constantly complained about negative narratives regarding its economy. Recent measures taken by China – including police raids of foreign consultancies and exit bans on foreign executives – have dominated international news coverage, painting the country as a hostile place for investors.
Still, China’s vast bureaucratic apparatus remains well-positioned to facilitate economic growth, and the government maintains a strong desire for foreign capital in the service of “high quality development”.
US vaccine maker Moderna is the latest example of how China can still coax foreign firms. The pharmaceuticals giant signed a “memorandum of understanding” with the Shanghai government in July to build a research and production facility. Just three months later, a plot of land as large as Hong Kong’s Victoria Park was ready for Moderna – an astonishing pace even by China’s standards.