The cold relationship between the Chinese government and Western countries led by the United States has prompted foreign companies to reconsider their investments in China.
November 6, 2023
Over the years, with the rapid development of the massive Chinese economy, foreign companies have also invested the profits earned in China for new recruitment and investment.
Now, as China's economic growth slows down and tensions between China and the United States intensify, foreign companies are starting to withdraw these profits from China.
According to the analysis of Chinese data, as of the end of September, foreign companies have withdrawn profits from China for six consecutive quarters, totaling over $160 billion. This rare situation indicates that the world's second largest economy is becoming less attractive to foreign capital. The continuous outflow of profits led to the first decline in China's total foreign direct investment in the third quarter in 25 years.
Foreign companies withdrawing profits further put pressure on the yuan. Due to investors no longer favoring Chinese stocks and bonds, and the scarcity of new investments in China, the People's Bank of China has been working to slow down the decline of the renminbi. Since the beginning of this year, the Chinese yuan has depreciated by 5.7% against the US dollar and hit its lowest level in over a decade in September.
Economists and corporate executives say that a series of factors have led to profit outflows. One of them is the widening gap between Chinese interest rates and those of the United States and Europe, making it more attractive to store profits in the West. The Federal Reserve and other central banks have been raising interest rates to combat inflation, while China has been lowering interest rates as policymakers struggle to cope with the long-term downturn in the real estate market.
However, as China's economic growth slows down and geopolitical tensions intensify, many foreign companies are finding better ways out for their funds. The cold relationship between the Chinese government and Western countries led by the United States has prompted global companies to rethink their supply chains and risk exposure in China.
Peter Kinsella, Global Head of Foreign Exchange Strategy at Union Bancaire Priv é, said, "Companies are starting to reduce risks related to China
According to Brad Bourne, CEO of Firan Technology Group, a Toronto aviation electrical company, the company's revenue from withdrawals from China in the first quarter of 2022 and 2023 was approximately CAD 2.2 million, equivalent to $1.6 million. In the past decade, the company has invested between 8 million and 10 million Canadian dollars to expand its business in China.
Bourne said the main reason for withdrawing cash from China is to provide funding for two recent acquisitions in the United States. But he also stated that the deterioration of US China relations is a concern for the company. As for how the tense relationship between China and the West/United States will change, it is certain that uncertainty will rise, "he said. Therefore, storing funds there carries certain risks
Unlike most other major economies, China does not distinguish between reinvestment profits and new foreign investment in its balance of payments (a country's international trading book), which is known as "greenfield investment".
However, the Chinese Ministry of Commerce will indeed release monthly green space investment data. By subtracting these data from the direct investment recorded in China's balance of payments, economists can roughly estimate the profit flow of reinvesting or transferring overseas in China.
The above data shows that from 2014 to the middle of last year, in all but two quarters, the reinvestment amount of foreign enterprises in China exceeded the amount of funds they transferred overseas. Taking 2021 as an example, the net reinvestment of foreign enterprises in China is 170 billion US dollars.
This situation changed in mid-2022, when China was in a sporadic state of lockdown and the Federal Reserve began raising interest rates to combat soaring inflation. Every quarter thereafter, funds continued to flow out.
Alex Etra, senior macro strategist at Exante Data, which tracks global capital flows, said, "In terms of future investment intentions, may this be a dangerous signal? It's possible
Recent surveys of American, European, and Japanese companies in China have shown that executives are pessimistic about new investments in China. The prospect of conflicts between China and Taiwan, as well as China's efforts to strengthen regulation of foreign companies operating domestically, have made these executives uneasy. In the third quarter, overall foreign direct investment in China was negative, with capital outflows exceeding inflows by $11.8 billion. This was the first time such quarterly negative values appeared in the single quarter balance of payments since 1998.
Compared to Western central banks, China has been lowering interest rates.
The United States has imposed restrictions on US investment in sensitive areas such as artificial intelligence in China and banned the export of high-end computer chips to China, fearing that these chips may be used by the Chinese military.
China has implemented an exit ban on certain foreign company employees and conducted a surprise inspection of the offices of consulting firms that provide services to multinational corporations earlier this year. The Chinese government has also expanded the scope of application of the anti espionage law to address some actions considered foreign threats, which may include routine corporate activities.
Some companies have revealed that they are transferring profits out of China, but have not disclosed many details. Swiss material technology company Oerlikon stated in February this year that 250 million Swiss francs, equivalent to 276 million US dollars, were transferred out of China in 2022. A spokesperson stated that this is a routine practice and stated that the company often transfers cash between major markets.
Chart Industries, headquartered in Georgia and producing cooling systems, stated in October that the company had transferred $35 million in cash back from China in the first nine months of this year. The company did not respond to requests for comment.
Andritz, an Austrian engineering group, stated in July that it chose to repatriate funds from China this year to provide funding for global investment and acquisitions, but did not disclose the exact amount. The company produces machinery for the water and electricity, paper, and steel industries.
A spokesperson for Andritz said, "In previous years, we have made significant investments in China to seize the growing market opportunities in China and Southeast Asia. We will use the returns from these successful investment projects for future investments and further acquisitions worldwide
The withdrawal of profits by foreign companies comes at a time when investors are disappointed with the Chinese financial market, and foreign capital is widely flowing out of China. The high interest rates and bond yields in the United States have also greatly reduced the attractiveness of Chinese stocks and bonds to global investors.
Since the beginning of 2022, foreign institutions have reduced their holdings of RMB denominated Chinese bonds, amounting to more than 110 billion dollars, while they have been buying them for many years. This wave of underweight began in the month of Russia's invasion of Ukraine, and market participants believe that the geopolitical risk of investing in Chinese assets is one of the main reasons for the underweight.
Last year, for the first time in more than 10 years, the yield of China's treasury bond was lower than that of US treasury bond of the same maturity. Afterwards, this gap continued to widen.
Recently, global investors have also become net sellers of mainland Chinese stocks. According to data provider Wind, they withdrew over $23 billion from RMB denominated stocks through the Shanghai Stock Connect and Shenzhen Stock Connect from August to October.
These outflows of funds have put pressure on the renminbi. Ju Wang, head of foreign exchange and exchange rate strategy for Greater China at BNP Paribas, said that the weakening of the renminbi has prompted companies to repatriate profits as soon as possible.
Wang said, "It can be said that the outflow of funds is mainly due to foreign investors wanting to find better investment opportunities in other places
As the People's Bank of China has been working to slow down the depreciation of the renminbi, the outflow of funds has increased the pressure on the renminbi.