Last year, China's direct investment liabilities in its balance of payments increased by $33 billion, marking an 82% decrease compared to 2022, as per data released on Sunday by the State Administration of Foreign Exchange. The indicator, which measures new foreign investment into the country, capturing monetary flows linked to foreign-owned entities in China, fell to its lowest level since 1993.
The data reflects the impact of the Covid lockdowns and a sluggish recovery in the preceding year. Investment declined in the third quarter of 2023 for the first time since 1998. Despite a partial recovery and returning to growth in the final quarter, the $17.5 billion in new funds during that period still stood one-third lower than the same period in 2022.
The State Administration of Foreign Exchange's data, which assesses net flows, can indicate trends in foreign company profits and changes in the scale of their operations in China. Foreign industrial firms in China experienced a 6.7% drop in profits last year compared to the previous year, according to data from the National Bureau of Statistics.
Earlier figures from the Ministry of Commerce revealed that new foreign direct investment into China hit a three-year low last year. It's important to note that MOFCOM's figures exclude reinvested earnings of existing foreign firms and are considered less volatile than the SAFE figures, according to economists.
The ongoing weakness underscores how foreign companies are withdrawing funds from China due to geopolitical tensions and higher interest rates in other regions. Multinationals are increasingly inclined to keep cash abroad as advanced economies raise interest rates while Beijing reduces them to stimulate its economy. A survey of Japanese firms in China indicated that most of these companies either reduced or maintained flat investment levels last year, with a majority expressing a negative outlook for 2024.
Despite these challenges, there are positive aspects. Direct investment into China by German companies reached a record of nearly €12 billion ($13 billion) last year, according to a report from the German Economic Institute based on Bundesbank data. This demonstrates a willingness to expand in the world's second-largest economy, even as the European Union intensifies scrutiny of such investments due to security concerns. The report also highlighted that investment in China as a share of Germany's total direct investment abroad expanded to 10.3% last year, the highest since 2014.
