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Pretty much everyone agrees that foreign direct investment has collapsed in China. But pretty much no one seems to agree on exactly how far it’s collapsed — including inside China.
Some of this is simply due to the fact that economic data is tricky to collect and subject to frequent revisions, especially knotty stats like FDI in large countries like China. Moreover, China has a . . . unique approach to economic statistics, which means people often try to reverse-engineer more accurate data from other series.
But no amount of lipstick could make the provisional third-quarter FDI data look better. The preliminary balance of payments data from China’s State Administration of Foreign Exchange released earlier this month indicated that inward FDI fell into negative territory for the first time since the series began in 1998.
Yet another set of official data seems to differ, in scale if not directionally.
SAFE indicates that cumulative FDI was just $15bn in the first nine months of the year — an almost 92 per cent slump since 2022’s total. However, the Chinese Ministry of Commerce puts it at a more moderate 33 per cent decline to $128bn in the first three quarters.
The second chart is from an interesting new paper by Nicholas Lardy, a senior fellow and resident China wonk at the Peterson Institute for International Economics.
Most of the discrepancy is actually pretty easy to explain. SAFE measures FDI on a net basis, while the Ministry of Commerce measures it gross. However, there are also other methodological issues that can complicate things.
SAFE’s net measure has usually been much higher than the ministry’s gross one because it includes things like Chinese offshore IPOs, minority private equity and venture capital investments and reinvested profits of foreign firms as FDI.
That the SAFE measure fell below the ministry’s data in 2022 indicates that foreigner investors began yanking money out then, presumably after the west’s economic response to Russia invading Ukraine and rising tensions around Taiwan.
And the $113bn gap between the two measures in 2023 indicates that they’re now ditching Chinese investments and pulling money out at a remarkably rapid pace. Here’s Lardy:
Foreign firms operating in China are not only declining to reinvest their earnings but — for the first time ever — they are large net sellers of their existing investments to Chinese companies and repatriating the funds . . . These outflows exceeded $100 billion in the first three quarters of 2023 and are likely to grow further based on trends to date.
If we extrapolate the net FDI number calculated by SAFE to an annualised $20bn in 2023 (as Lardy notes, that might actually be optimistic given the collapse we’re seeing) that means China is on track to attract less FDI than Poland did in 2022, and less than half of what Sweden did, according to Unctad.
This goes a long way towards explaining why Xi Jinping went on an American charm offensive earlier this month.
He even gladhandled US business executives in San Francisco, stressing that China is “both a super-large economy and a super-large market” and “a partner and friend of the US”. (This might be an easier sell if he wasn’t also forcing foreign business executives in China to attend lectures on “Xi Jinping Thought”.)
Lardy’s certainly sceptical . . .
Time will tell whether President Xi’s words will first stem the current large foreign direct investment (FDI) outflows and eventually lead to a resumption of the net FDI inflows that China has enjoyed for more than four decades. A safe assumption is that it will take more than words to accomplish this objective.
Further reading
— The great Chinese flow reversal (FTAV)
