- Written by Annabelle Liang
- Business reporter
Image source, Getty Images
Chinese leader Xi Jinping is scheduled to meet his American counterpart, Joe Biden, on Wednesday
Official data show that foreign companies are withdrawing money from China at a faster rate than they were investing in it.
The country’s slowing economy, low interest rates, and geopolitical conflict with the United States have raised doubts about its economic potential.
But companies already seem to be erring on the side of caution.
“Concerns about geopolitical risks, uncertainty about domestic policies and slowing growth are pushing companies to consider alternative markets,” says Nick Marrow of the Economist Intelligence Unit (EIU).
China recorded a deficit of $11.8bn (£9.6bn) in foreign investment in the three months to the end of September – the first time since records began in 1998.
This indicates that foreign companies are not reinvesting their profits in China, but rather moving money out of the country.
China needs to make ‘corrections’
“China is currently facing slower growth and needs to make some corrections,” says a spokesman for Swiss industrial machinery maker Oerlikon, which withdrew 250 million francs ($277 million; £227 million) from China last year.
“In 2022, we were one of the first companies to transparently announce that we expect the economic slowdown in China to impact our business,” the spokesperson adds. “Therefore, we started early to implement procedures and measures to mitigate these impacts.”
China remains a key market for the company. It employs nearly 2,000 employees across the country, accounting for more than a third of its sales.
Oerlikon pointed out that the Chinese economy is still expected to grow at about 5% in the next few years, “which is among the highest rates in the world.”
Since the beginning of the pandemic, companies like Oerlikon have faced the challenges of operating in the world’s largest market.
China has implemented one of the world’s strictest lockdowns due to the pandemic through its “zero Covid” policy.
This has disrupted the supply chains of many companies, such as tech giant Apple, which makes most of its iPhones in China. The company has since diversified its supply chain by moving some production to India.
Image source, Getty Images
Apple has moved some iPhone production away from China
“We’re not seeing many companies pulling out of China. Many of the big multinationals have been in the market for decades, and they’re not willing to give up market share they’ve spent 20, 30, 40 years cultivating.” But in terms of new investments, in particular, we are seeing a reassessment.
Low interest rate
Companies are also considering the impact of interest rates. China bucked this trend, as many countries around the world raised interest rates sharply last year.
Several major central banks, including the US Federal Reserve and the European Central Bank, have raised interest rates to tackle inflation. The higher cost of borrowing, which promises higher returns, also attracts foreign capital.
Meanwhile, China’s policymakers have lowered the cost of borrowing to support its economy and the struggling real estate industry. The value of the yuan has fallen by more than 5% against the dollar and the euro this year.
The European Union Chamber of Commerce in China says that instead of reinvesting China’s profits in the country, companies are spending money.
“Those who have surplus cash and profits in China are increasingly transferring this money abroad, where they will receive a higher investment return compared to investments in China,” he adds.
Michael Hart, president of the American Chamber of Commerce in China, noted that some companies have withdrawn their profits from China “as part of their long-term cycles” to turn profits “once their projects reach a certain scale and profitability.”
He added, “Withdrawing dividends does not necessarily indicate that companies are dissatisfied with China, but rather indicates that their investments here have matured.”
This is “encouraging because it means companies are able to integrate their China operations with their global operations,” Hart says.
Firan Technology Group, a Canadian-based avionics and aerospace electronics company, has invested up to C$10m (US$7.2m; £5.9m) in China over the past decade, withdrawing C$2.2m from the country last year and in the quarter. 1st of 2023.
“We’re not exiting China at all,” says company president and CEO Brad Bourne. “We’re investing and growing our business there and pulling any excess money to invest elsewhere in the world.”
Image source, Getty Images
China limits exports of germanium needed to make chips
“We had excess cash in China, and bringing it back to help finance our recent acquisitions in the US was just prudent cash management, and it meant our borrowing was lower,” he adds.
Uncertainty in the future
Analysts say there is a lot of uncertainty about what lies ahead – both in terms of interest rates and relations between China and the United States.
China’s central bank may move to cut interest rates further this year to support its economy, says Dan Wang, chief economist at Hang Seng Bank China.
Lowering interest rates could put further pressure on the already weak yuan. “There is very limited scope for monetary easing at the moment due to currency depreciation pressures,” she says.
“If economic sentiment improves next month, it is safe to say that China will cut interest rates. But if sentiment does not improve, the central bank will have a very difficult decision to make.”
Mr Marrow of the Economist Intelligence Unit says companies are cautiously optimistic about the upcoming meeting between Presidents Xi and Biden.
“Direct meetings between the two presidents tend to exert a stabilizing force in bilateral relations. We have also seen a flurry of diplomatic engagement between the United States and China over the past two months, which has contributed to this sense that both sides are aiming to bring an end to the conflict.” The word is within the relationship,” he says.
“However, it does not take much for things to fall apart again. Until companies and investors feel they can deal with more certainty, this withdrawal of foreign investment in China will continue.”