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China is trying to pull in foreign investors who are increasingly finding it to be a less attractive place to put their money, despite abundant opportunities. Illustration: Lau Ka-kuen

‘Completely underinvested’ China woos foreign investors but still withholds what they want most

  • An outpouring of money and assets has Beijing scrambling to lure back capital by touting China’s massive market and lucrative opportunities
  • But getting foreigners to once again invest in China is an uphill struggle as zero-Covid, geopolitical tensions and other risks make second-largest economy less attractive

In the midst of rising concerns over an exodus of foreign capital, China continues to remain “highly investible” to the world, at least in the eyes of analysts and insiders.

But even as Beijing mounts a charm offensive to woo overseas investors, its political decisions are complicating the landscape for inbound capital flows, making would-be investors more reluctant to move assets into China or keep them there, even as experts attest that the country remains “completely underinvested”.
To combat the trend, which threatens to further strain China’s already precipitous economic recovery, the commerce ministry is imploring local-level task forces across the country to step up exchanges with foreign-invested enterprises, offering them better services and support in the hope that such efforts will see them write more cheques, including for foreign-invested infrastructure.

“[Local teams should] intensify efforts to attract more investment and to secure more commitments of investment intentions,” a ministry statement said on Monday, following its meeting on Thursday.

As firms eye China ‘de-dependence’, investment door ‘will only open wider’

However, a bevy of reports from European and American lobby groups in recent weeks have warned that the foreign business community’s confidence in the world’s second-largest economy has faltered, resulting in the postponement or cancellation of investment plans in China this year.
While many of the foreign firms say they have no intention of leaving China altogether, they continually point to lingering and unpredictable disruptions from its zero-Covid policy, as well as from geopolitical entanglements.

So, even though overall emerging market portfolios started to show signs of recovery in August, it still marked the seventh straight month that China’s debt markets suffered a net outflow, meaning more money is leaving than coming in – a trend that has been expedited by the US Federal Reserve’s aggressive interest rate hikes this year.

Foreign investors have slashed their holdings of Chinese bonds by more than 520 billion yuan (US$72.5 billion) this year, to 3.48 trillion yuan at the end of August, according to China’s central bank. The moves have been largely driven by the combined 300 basis points worth of rate hikes by the Fed over the past six months, which have pushed up the US dollar index and dragged down most other currencies, including the yuan.

The rapid weakening of the yuan serves to deepen concerns of further capital outflows from Chinese financial markets.

Meanwhile, the year-to-date capital inflows in Chinese stocks hit a seven-year low in the first eight months of 2022, according to data from the Institute of International Finance.

“[We] have had no transactions in China in 2022,” said Mr Chen, a Shanghai-based vice president with a foreign private equity fund, citing the “uncertainty of policies” as a major reason.

Chen’s fund has bet on the growth outlook of China’s 1.4-billion-strong consumer market, but he says China’s unwavering coronavirus containments have pummelled the consumer sector. As a result, many companies are performing worse this year than earlier in the pandemic, instead of seeing a long-awaited rebound.

Meanwhile, “due to poor results and lower valuations, companies are also unwilling to sell their equity cheaply”, Chen added.

The government has interfered too much in some areas … It’s become very difficult to gauge the political winds
Chen, foreign private equity fund

Aside from uncertainties over when strict lockdown and containment measures will be lifted in China, rising political risks in the domestic business environment – coupled with tensions between Beijing and Western countries – also make the Chinese market less attractive to foreign investors, Chen said.

“The government has interfered too much in some areas … like in off-campus tutoring and medical beauty industries last year,” he said. “It’s become very difficult to gauge the political winds.

“The Covid policy needs to be adjusted, and the regulations on key industries should be continuous, without sudden changes.”

Despite recurring alarms over the waning momentum of foreign investment in China, official figures still paint a relatively rosy picture on inbound flow for both the real economy and the financial sector.

‘Should we stay or go?’ China’s zero-Covid policy has manufacturers asking

Commerce ministry data shows that foreign direct investment in China rose by 20.2 per cent from a year earlier to US$138.4 billion in the January-August period, with an increase of 123.7 per cent from the European Union.

However, that indicator – also known as “the actual use of foreign investment” – measures the money that China received from implementing old contracts, and the year-to-date growth rate was on a downward trajectory this year.

Figures from the Chinese stock regulator showed that a total of 63.2 billion yuan in foreign capital was channelled into the A-share market through Stock Connect schemes during the first eight months of 2022.

Based on that, the official Economic Daily argued in a commentary on Friday that, “from a longer-term perspective, the pace of foreign investment into China has not slowed down”.

[There appears to be] a widening gap in how European firms perceive the balance of risks and opportunities in the Chinese market
Rhodium Group report

The story for 2022, so far, has been of a net portfolio outflow from the Chinese market, with a marginal gain in inflows offset by increasingly bigger capital outflows, according to Agatha Kratz, a director at the Rhodium Group.

In a report this month, the research provider said that, while a handful of large European firms, many of them German, have continued to pour money into their China operations, many other European firms with a presence in the Asian country were withholding new investment.

“Our findings point to a widening gap in how European firms perceive the balance of risks and opportunities in the Chinese market. They also suggest that a more nuanced perspective on the issue of European corporate dependencies is needed,” the report says.

Still, Kratz said that there was “so little” new foreign investment in China at the moment.

How much is China’s foreign direct investment, is it still a good destination?

“Of course it is investible – it should be investible, it’s the second [largest] economy on Earth,” Kratz said during a webinar on Friday. “But a lot of policies, political decisions, geopolitical decisions are making the country less attractive.”

Kratz also said that while the yuan’s recent depreciation, resulting from the US Fed’s aggressive rate hikes, is affecting some investment decisions in China, foreign firms are more concerned with zero-Covid restrictions, valuation issues, and a lack of market access.

And she says China is now “completely underinvested” in terms of portfolio inflows, given that the country accounts for nearly one-fifth of the global economy.

“It should be attracting that much more, if there were market reforms, if there was a credibility that the market wasn’t so political,” she said.

Joerg Wuttke, president of the European Union Chamber of Commerce in China, echoed her view, calling the Chinese market “highly investible”.

“The appetite is there in Europe, very clearly. But again, the hurdles are high, and China is far away in many ways,” he said at the same webinar, adding that it boils down to the question of when China will rejoin the international economic community by opening its borders.

Given its growing middle-income group and digital and green transformation, China’s market will continue to have the largest development potential in the world, according to Miao Wei, a former minister of industry and information technology.

In addition to China’s vast environment for their goods and services, foreign firms can also form new technological research partnerships in China as the country makes a bigger push to boost home-grown innovation, added Miao, who is now deputy director of the economic affairs committee for the nation’s top political advisory body, the Chinese People’s Political Consultative Conference (CPPCC).

Zero-Covid pushes China’s foreign businesses to ‘tipping point’

“Farsighted entrepreneurs will never give up the opportunity to develop in China,” he said during the fall summit of the Global Asset Management Forum, hosted by the China Wealth Management 50 Forum think tank.

“What companies need most is the market, while what a market doesn’t lack the most are companies. In some markets, you would be quickly substituted by others if you leave, and it would be very difficult to get back [your place] once lost,” he said.

His comment struck a chord with representatives of several foreign financial companies at the event.

“The Chinese market remains the largest and most attractive asset-management market in the world,” said Raymond Yin Lei, head of Asia-Pacific and China onshore for UBS Asset Management.

Jodie Hampshire, head of Asia-Pacific for Russell Investments, said that they are looking to help customers allocate Chinese assets around the world, in light of China’s large role in the global economy and Chinese stocks’ rising weight in various indices.

China has become a magnet for international capital but still faces complaints from foreign financial institutions about having to wait years for business approvals, acknowledged former Chinese finance minister Lou Jiwei at the Global Asset Management Forum.

Lou stressed, however, that such regulatory hurdles also exist for domestic financial institutions.

“This is a problem of our regulations not being transparent enough, and it needs to be improved,” said Lou, who is now director of the CPPCC’s foreign affairs committee.

The Economic Daily’s commentary last week similarly called for China to build a more “predictable” regulation environment, and stressed the need to get the national economy back on track to shore up foreign investor confidence.

“The internal and external environments for stabilising foreign investment are becoming more severe and complex,” it warned.