by Amanda Lee & Mandy Zuo in SCMP, Nov 9, 2023
Shanghai China needs to up its game if it hopes to restore confidence in its economy and woo foreign investment, economists and policy advisers say as the world’s second-largest economy has seen a first-ever quarterly deficit in direct investment liabilities.

Wang Tao, chief China economist for UBS Investment Bank in Hong Kong, said the fall in foreign investment has been driven by factors such as “de-risking” efforts by Western governments and the high costs of borrowing in the US dollar.

“All foreign firms are concerned about political and commercial pressure from their governments, as well as other risks. Even though it might not be economically beneficial, they may still consider reducing their participation in China, moving towards the so-called China-plus-one strategy, by adding exposure to other countries,” Wang said at a seminar on Wednesday that focused on the current investment pattern and development prospects in China.

“For foreign investment to return to the level that had been seen over the past decade would be very difficult,” Wang added. “We’re not optimistic, and we believe if it can go back to half of what it was over the past decade, it would be pretty amazing.”

Direct investment liabilities – a broad measure of foreign direct investment (FDI) that includes foreign companies’ retained earnings in China – were at a deficit of US$11.8 billion during the July-September period, according to the preliminary balance of payments data released by the exchange regulator last week.

That marked the first quarterly deficit since the State Administration of Foreign Exchange (SAFE) began collecting such data in 1998.

Although foreign investment made up only around 2 per cent of China’s gross domestic product (GDP) on average over the past decade, its presence in the country brought about advanced technology and management, international standards, rules and competition, according to Wang, who noted that the further easing of travel restrictions and cross-border capital flow would help retain foreign investment.

Foreign investors are also increasingly concerned with the long-term prospects of China’s annual economic growth, with some fearing that it could fall to just 2 or 3 per cent in the coming years, Wang said.

Shen Jianguang, chief economist at JD.com, China’s largest online retailer, said it’s important for the nation’s economic growth to remain at a “reasonable” level because strong consumption is also a critical component of winning over foreign investors.

“The next thing to do is step up fiscal policy and subsidise those with lower incomes, implementing measures to boost employment and stabilise the property market – I think all of these would help attract foreign investment,” Shen said at Wednesday’s seminar, which was arranged by Renmin University in Beijing.

Liu Yuanchuan, president of the Shanghai University of Finance and Economics, also said at the seminar that political pressure from the US and changes in China’s trade structure have prompted the old guards, such as Japan, one of China’s biggest foreign investors, to move away from the country.

“Right now, the downturn is likely to be temporary, but that won’t last for long,” Liu said, adding that China should continue to leverage its huge market size and build on its strong foundation.

Meanwhile, at the China International Import Expo in Shanghai, other economic experts similarly discussed the state of foreign investment in the country.

Luo Yuze, deputy director of the Department of Foreign Economic Research of the Development Research Centre of the State Council, said that while it is inevitable some foreign investors may leave, he believes most are still interested in China.

“The impact of non-economic factors is rapidly increasing [on foreign investment]. Both the national and corporate levels are paying greater attention to security issues.,” Luo said. “Globalisation has not stopped nor regressed, but there has been divergence and differentiation.”

Former World Trade Organization deputy director general Yi Xiaozhun said that political pressure alone does not mean better security in supply chains for multinationals.

“Failure to act in accordance with economic laws and simply emphasising ideology and choosing sides will be difficult to sustain in the long term,” Yi said, speaking at the CIIE on Monday at a forum organised by the Centre for China and Globalisation think tank.
https://www.scmp.com/economy/china-economy/article/3240805/chinas-foreign-investment-boon-years-past-has-ended-economists-say-all-hope-not-lost-fdi