The Decline: China's Foreign Investment Takes a Negative Turn
Foreign Investment refers to investment made by foreign entities such as individuals or corporations, into a domestic economy. These investments can be done in a number of ways and could have a significant positive impact on the recipient nation as well as the investor.
It is essential to the global economy because it gives nations access to resources like finance, technology, and knowledge. Countries can develop laws and policies that stimulate investment and advance economic expansion by having a thorough understanding of the various forms of foreign investment like FDI, FPI, etc.
Foreign Direct Investment (FDI) is an investment made by an individual or a company into the business interests of another country in the form of either establishing new business operations or acquiring existing business assets and Foreign Portfolio Investment (FPI) is an investment made by an individual or institution into securities of a foreign country.
China's heyday as a manufacturing hub for international businesses is drawing to an end as China's direct investment liabilities in its balance of payments declined by $11.8 billion recently in the 3rd quarter of 2023. FDI in greenfield and mergers and acquisitions (M&A) is falling in China, and as other Asian nations gain attractiveness, investors' concerns about China's future are growing.
For the first time since 1998, China has seen more outflows of FDI than inflows as risks rise due to intensified anti-spying activities and tensions over semiconductor technology with the United States.
Also, FDI into China is declining as companies are decreasing their dependency on the country post-COVID-19, amid geopolitics, rising costs, and supply chain concerns. The decrease in FDI is measured by the balance of payments as it indicates that international businesses are less inclined to reinvest their profits in China. This is a result of damaged relations with the West and the growing allure of holding cash abroad.
The FPI in Chinese companies has been weak this year due to concerns about economic growth and better returns elsewhere. In the third quarter of 2023, mainland shares valued at Ұ 172 billion were sold by foreign funds.
China's economy is struggling as demand has slowed down due to rising unemployment and the real estate crisis, and its exports are being hit hard by a decline from overseas markets. All these factors have made China slip into Deflation and have created a worrisome situation for its foreign investment.
Kautilya, IBS Mumbai.