China has recently reported its first-ever quarterly deficit in foreign direct investment (FDI), according to the latest balance of payments data. The deficit of direct investment liabilities, which include foreign companies’ retained earnings in China, reached $11.8 billion during the July-September period. This is the first quarterly shortfall since China started compiling this data back in 1998.
One possible reason for this deficit could be the “de-risking” moves conducted by Western countries, as they are increasingly reducing their exposure to China. Additionally, China’s interest rate disadvantage might be prompting multinational companies to repatriate their earnings. The interest rate gap between China and other countries has put pressure on the Chinese currency and has led firms to remit their retained earnings out of the country.
Geopolitical tensions may also be playing a role in hindering China’s ability to attract foreign direct investment. While there is no concrete evidence of foreign companies reducing their presence in China yet, the escalation of these tensions could further strain the FDI inflows.
In response to these dynamics, Chinese authorities are expected to adopt strategic measures to alleviate pressure on the Chinese currency. The onshore yuan trading against the dollar hit a record low volume in October, signaling efforts to curb yuan selling. The People’s Bank of China has already urged major banks to limit trading and discourage clients from exchanging yuan for the dollar.
In September alone, foreign exchange outflows from China rose sharply to $75 billion, marking the highest monthly figure since 2016. This further necessitates the intervention of China’s central bank to stabilize the currency.
The current deficit in FDI and ongoing capital outflow pressures highlight the challenges faced by China’s economy. As China addresses these issues and implements measures to attract and retain foreign investment, the global economic community will closely observe how this situation unfolds and its potential impact on the world economy.
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