In Depth: China’s Responses to Crumbling Foreign Investment May Take Time to Stoke Rebound

13 Dec 2023

By Wang ShiyuWang Liwei and Zhang Yukun

While some foreign investors have been pulling money out of China as confidence has been battered, recent government efforts could be setting the stage for a rebound, but it may take time, analysts told Caixin.

“Many investors we talked to during a September visit to Wall Street said they weren’t expecting China to backpedal from opening up its financial sector,” a Chinese economist said. “But they still leaned toward caution (when it came to investing in China) because of current geopolitical risks and (its) subpar economic recovery.”

Financing brick-and-mortar businesses requires long investment cycles, so even if China goes all in now to attract foreign investment, it may take a few years to see a significant impact, Michael Hart, president of American Chamber of Commerce in China (AmCham China), told Caixin in a recent interview.

It remains to be seen how stepped-up government efforts will play out, as wooing foreign investors back to invest in China’s real economy and capital markets may not be easy.

Slumping direct investment

Net foreign direct investment (FDI) into the Chinese mainland in the third quarter continued its steep slide, recording its first negative reading since the key economic measure began being compiled 25 years ago, according to preliminary data published by the State Administration of Foreign Exchange (SAFE) last month.

The gauge, under China’s capital and financial account, fell to negative $11.8 billion in the July-to-September period, down from the $6.7 billion reading in the second quarter that marked the second-lowest on record, according to SAFE’s updated first-half data.

Meanwhile, FDI data released by the Ministry of Commerce, a different gauge for overseas investment in China, showed that total FDI tumbled 9.4% year-on-year to 987 billion yuan ($137.5 billion) during the first 10 months this year.

The American Chamber of Commerce in Shanghai’s (AmCham Shanghai) 2023 China Business Report shows that 40% of the 325 respondents to its survey were redirecting or planning to move out investment originally planned for China, up 6 percentage points from last year, with Southeast Asia remaining the most popular destination.

The AmCham Shanghai respondents’ confidence in their five-year business outlook in China sank to the lowest point in the survey’s 25-year history, with a little more than half — 52% — expressing optimism.

Diminished enthusiasm from foreign investors has been met by China’s policymakers with pledges to further open up markets and targeted measures to attract fresh investment.

The State Council, China’s cabinet, issued a 24-point guideline in August for attracting foreign investment. It encouraged eligible foreign investors to establish investment vehicles and regional headquarters in the country and promised equal support to overseas and domestic companies. Preferential income tax policies for foreigners working in China were also extended, according to a government statement published that month.

In September, central bank Governor Pan Gongsheng sought opinions from a number of global businesses, including JPMorgan Chase & Co., Deutsche Bank AG and Tesla Inc., on lending more financial support to foreign trade and investment.

In October, President Xi Jinping vowed to remove all restrictions on foreign investment in the manufacturing sector.

The following month, commerce ministry spokesperson Shu Jueting said at a press briefing that the ministry will look at removing more sectors from the negative list for market access to overseas investors.

Nonetheless, policy moves to shore up foreign investments are unlikely to result in any quick turnaround, according to AmCham China’s Hart.

Rising concerns

Out of the 325 U.S. companies in the AmCham Shanghai survey, 17% ranked China as top in their headquarters’ global investment plans, down from 18% in 2022 and 27% in 2021.

“Among companies reporting plans to curb investment, 70% blamed uncertainty about U.S.-China tensions, 49% cited slowing growth in China, and 48% expressed concern over future Chinese commercial policies,” the chamber said.

Some of China’s woes are the residual hangover from the pandemic years. Besides macroeconomic and policy factors, some foreign businesses were forced to reduce their investments in China because access to the country was limited by strict Covid control measures.

Even in the best of times, most multinational corporations go through a lengthy procedure that includes onsite inspection before expanding investments in a new market. But in the past three years, this proved difficult in China, Hart told Caixin. While not all investment plans were interrupted, some were shelved, he said.

The AmCham Shanghai survey identified industrial manufacturing as one industry that has become much less keen to invest further in China, with only 26% of the survey respondents in 2023 ranking China as a top-three investment target, down from 40% last year.


Some see the relocation of manufacturing supply chains from China to other countries as an inevitable trend.

In recent years, governments in several nations, including the U.S., Japan, South Korea and some in Europe, have encouraged their companies to shift manufacturing production away from China, either to their home country or to other regions such as Southeast Asia, Latin America and Eastern Europe. Meanwhile, the China-U.S. trade war has led some manufacturers to shift capacity from China to avoid additional U.S. tariffs.

“These recent developments are on top of a longer-running shift of manufacturing capacity from China to other countries by some firms because of rising costs in China,” Louis Kuijs, Asia Pacific chief economist at S&P Global Ratings Inc., previously told Caixin.

“It’s normal, and China doesn’t need to ‘force companies to stay,’” said Shi Lei, chairman of Attractor Systemic Fintech. Instead, China needs to shoulder the risks associated with this global supply chain transition, including improving the social safety net for when companies get weeded out and people lose jobs.

Investment in the capital markets

A UBS report showed that in August, China assets accounted for 3.1% of the portfolios of the almost 900 long-only foreign funds tracked by the investment bank, down from 6.5% in January 2021. More than a third of the funds had sold all their China holdings.

While some global investors may be concerned with China’s economic woes, capital outflows may also be driven by competitive factors, namely better yields in other markets.

From March 2022 to this past September, the yuan weakened significantly, as the spread on U.S. and Chinese short-term interest rates first narrowed and later reversed, eventually resulting in higher rates in the U.S. compared to China, which pushed the returns on dollar-denominated assets higher than those denominated in yuan. The main reason behind the rate differentials is that during the period, China cut interest rates to bolster the economy, while the U.S. did the opposite to tame high inflation.

As the U.S. rate hike cycle looks set to peak and the resulting pressure on the yuan eases, capital may return to China in the short and medium term, once China’s economy shows more signs of stabilizing, Chun Lai Wu, head of China asset allocation at UBS’ Hong Kong branch, told Caixin.

Global institutional investors are closely watching how the U.S. rate hike cycle plays out while holding a wait-and-see stance toward the Chinese economy’s gradual recovery from the pandemic.

Already, there are signs that flight from China’s capital markets may be tapering off, analysts said.

There are promising buying opportunities in the Chinese market, which should be attractive for investors. For example, the valuation of China’s stock market overall is relatively low, said Jason Liu, head of Deutsche Bank’s Asia-Pacific chief investment office.

“But the restoration of confidence needs support from macro data,” he said.

Read also the original story. is the English-language online news portal of Chinese financial and business news media group Caixin. Global Neighbours is authorized to reprint this article.

Image: atosan –