This short note aims to decipher a striking chart related to current economic events. This Killer Chart looks back at the historic decline in foreign direct investment (FDI) in China.
Download the PDF: Killer-chart-China-FDI-inflows
Why is this interesting?
Since joining the World Trade Organization (WTO), China has attracted a growing volume of foreign direct investment (FDI) to its territory. Foreign companies have taken advantage of the opportunity presented by China as a production base and consumer market to set up production facilities there.
While this trend was almost continuous between the early 2000s and 2015, a first marked slowdown was observed following the stock market crash and real estate crisis of 2015-2016. After a rebound in FDI between 2017 and 2021, the real estate crisis in the summer of 2021, which was ten times more severe than the previous one, led to a collapse in FDI inflows into China.
The decline was so severe that FDI inflows into China were even negative in thethird quarter of 2023 (-$12 billion) and thesecond quarter of 2024 (-$15 billion).
What are we to make of this?
While it may not be intuitive that incoming FDI can be negative, it is important to understand what it contains. There are two main items within a country’s incoming FDI:
- Investments made by foreign companies in new facilities on the soil of the country concerned; and
- Profits generated and reinvested by foreign companies already established in the country concerned.
However, if a foreign company decides not to reinvest its profits and to repatriate them to its country of origin, then these profits are recorded, according to accounting standards, as a deduction from FDI inflows and not as FDI outflows.
This is precisely why FDI inflows have recently been negative in China. The withdrawal of profits by foreign companies (USD 48 billion in thesecond quarter of 2024) exceeded the amount of investment in new facilities (USD 33 billion).
It is striking to note that the decline in FDI inflows into China is almost exclusively due to the historic drop in reinvested profits. While these profits contributed positively to the tune of USD 35 billion on average each quarter in 2020 and 2021, the trend has completely reversed to the point where profit withdrawals from China have averaged USD 35 billion each quarter since the beginning of 2023.
This reflects the growing aversion of foreign companies to China in a context of rising protectionism and where the Chinese government’s growing control over the economy is restricting entrepreneurial freedom. This is particularly true as China quietly pursues its goal of ousting large foreign-owned groups in favor of Chinese-owned companies. This is particularly the case in the automotive sector, where foreign manufacturers now account for only 33% of car sales in China, compared with more than 60% before the Covid crisis. The same is true in the restaurant sector, where the giant Starbucks, for example, is seeing its revenues melt away in China, losing market share to Chinese brands such as Luckin Coffee.
However, this strategy could prove dangerous if, at the same time, China invests heavily in other countries through FDI, leading to a sharp deterioration in China’s financial account (see this other Killer Chart published on BSI Economics).
