Foreign investment in China turns negative for the first time in 25 years: Report

Foreign investments in China have turned negative for the first time since 1998, according to Bloomberg. China's direct investment liabilities, a measure of FDI, declined by $11.8 billion in the third quarter, the report said citing the country's foreign exchange administration.

"This is big. FDI moves from 100 billion dollars to negative in China," said Nilesh Shah, Managing Director of Kotak Mutual Fund.

The flow of money was recorded in foreign-owned entities operating in China. The decline in FDI has been attributed to China's strained ties with the West and higher interest rates elsewhere. The US and other Western countries have been raising interest rates to contain inflation while China has slashed the rate to pump up the slowing economy. Higher interest rate elsewhere has also prompted capital flight from China.  

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Economists told the news agency that the decline in FDI reflected less willingness by foreign companies to re-invest profits made in China in the country.

China's other main measure of foreign direct investment inflows reached 920 billion yuan ($125.8 billion) in the first three quarters of this year, down 8.4 per cent compared with the same period in 2022, the report said, adding that the measure is impacted by the decline in the Chinese currency's value relative to the US dollar this year.

China's economy is struggling as demand has slowed down due to rising unemployment and the real estate crisis. China's second-largest property developer Evergrande filed for bankruptcy earlier this year and now the largest real estate firm - Country Garden - is on the verge of collapse.

The report said that foreign companies in China operating in export-oriented and industrial sectors have seen a decline in their profits this year. The balance of payments data could mean that "there are more divestments than new investments," Michelle Lam, Greater China economist at Societe Generale SA, told Bloomberg.

"That's quite concerning. I think it’s just continued diversification of supply chains. Confidence will take time to recover following the more supportive measures."

Bloomberg also reported that foreign funds sold 172 billion yuan worth of mainland shares in the three months ending October. That threatens to turn this year's foreign flows negative for the first time since China opened a second mainland Hong Kong stock trading link in late 2016, it said.

Foreign institutional investor holdings of bonds in China's interbank market fell from a record 4 trillion yuan in 2021 to 3.19 trillion yuan at the end of September, the report said citing data from China's central bank.

The IMF in its latest assessment report said that China's real GDP is projected to grow by 5.4 per cent in 2023 and slow to 4.6 per cent in 2024 amid continued weakness in the property sector and subdued external demand. "Over the medium term, growth is projected to gradually decline to about 3½ percent by 2028 amid headwinds from weak productivity and population aging," the global lender said in a note prepared by its staff which recently visited China.

The institution further said that the financial stability risks are elevated and still rising, "as financial institutions have lower capital buffers and growing asset quality risks".