In a remarkable shift, China is experiencing a net outflow of foreign investment for the first time since 1990. Data from the State Administration of Foreign Exchange (SAFE) reveal that in the second quarter of this year, direct investment liabilities in China fell by US$14.8 billion, with a decrease of US$4.5 billion in the first half of the year alone. This trend marks a significant turn from previous years, where foreign investment steadily flowed into China.
The decline in foreign investment is influenced by several international strategies, including the United States’ encouragement of a “China plus one” policy. This approach urges companies to diversify their investments beyond China to mitigate risks and avoid potential geopolitical frictions. The European Union has also contributed to this shift by initiating anti-subsidy investigations into Chinese exports of electric vehicles and clean energy products, prompting some foreign businesses to reduce their investments in China.
Concurrently, there has been an increase in Chinese companies establishing operations abroad. This outward expansion is partly driven by attempts to circumvent potential tariffs and reduce production costs. In the first half of the year, China’s overseas direct investment (ODI) rose by 16.6% to US$72.62 billion. These moves are part of a broader strategy to secure China’s supply chain and stabilize its economy in the long term.
Mao Zhenhua, co-director of Renmin University’s Economic Research Institute, highlights the ongoing need for China to attract foreign technology and investment to maintain its industrial and technological growth. Despite a growing sentiment of nationalism that may view employment at foreign firms or consumption of foreign goods as unpatriotic, Mao emphasizes the importance of adhering to a mutual-benefit principle in international trade and maintaining a welcoming environment for foreign investors.
This shift comes amid an era where China is experiencing not only a decrease in foreign capital but also a significant socio-economic impact on its workforce. With the relocation of manufacturing from China to countries like Vietnam and India, many skilled Chinese workers have found themselves without suitable employment, pushing them into lower-wage jobs, such as food delivery.
Despite these challenges, the Chinese government remains optimistic. Measures introduced in March and June aim to rejuvenate foreign investor interest, with effects expected to materialize soon. Moreover, while some foreign companies have exited China, leading to a potential increase in market share for domestic firms, there is a concern that this might reduce the incentive for local companies to enhance their competitiveness.
The economic landscape in China is clearly undergoing significant changes, influenced by both global economic policies and internal strategic shifts. As China navigates these complex dynamics, the long-term impact on its global economic position remains to be seen.
