China remains an attractive market for many Western companies, but the first quarterly deficit in foreign investment in its history underscores the challenges Beijing is facing to attract foreign businesses, against a backdrop of rising geopolitical tensions with the United States, low interest rates and weakening domestic demand.

Despite the good macroeconomic data on industrial production and retail sales in China presented last month, the Chinese economy is showing signs of exhaustion that may have negative ramifications for public finances, given the growing government debt.

Beyond the real estate crisis, US economic sanctions, the drop in exports experienced every month of 2023 compared to the previous year, low-interest rates and a weakening of domestic demand, foreign companies are pulling money out of the Chinese market at a faster pace than they are investing it.

In the July-September period, according to preliminary balance of payments data, foreign companies in China recorded a direct investment deficit of almost 10.854 billion euros. This is the first time the country has recorded such deficits since records began in 1998.

Low returns on investment

Weakening domestic demand and low-interest rates have meant that many of these companies are not getting the returns they expected from their businesses and are opting to take capital out of the country for higher returns or to reduce exposure to geopolitical risk. According to Goldman Sachs analysts, “Part of the weakness in direct investment inflows into China may be due to profit repatriation by multinational companies”.

Although this is not good news for China, Beijing has downplayed the importance of foreign capital flight. Wang Wentao, China’s Minister of Commerce, stressed that China remains a magnet for global investors and pledged further measures to expand consumption, as well as to stabilise foreign trade and investment, to promote a sustained economic recovery.

Whatever measures the Chinese government may implement, and given the great commercial interests or opportunities in the Chinese market, it would be premature to draw definitive conclusions about whether this investment shortfall is a one-off event or the start of a new trend that will continue over time.

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