June 25, 2024

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China’s first deficit in foreign investment indicates “de-risking” pressure from the West

China’s first deficit in foreign investment indicates “de-risking” pressure from the West

SHANGHAI (Reuters) – China posted its first-ever quarterly deficit in foreign direct investment, according to balance of payments data, highlighting capital outflow pressures and the challenge Beijing faces in attracting foreign companies in the wake of a “risky export cut” move… Taken by Western governments.

Direct investment commitments – a broad measure of foreign direct investment that includes retained earnings of foreign companies in China – recorded a deficit of $11.8 billion during the period from July to September, according to preliminary balance of payments data.

This is the first quarterly deficit since China’s Foreign Exchange Regulatory Commission began compiling data in 1998, which can be linked to the effect of Western countries’ “de-risking” from China, as well as China’s interest rate disadvantage.

“Some of the weakness in China’s inward FDI may be due to multinational companies repatriating profits,” Goldman Sachs wrote.

“With interest rates in China lower for longer, while interest rates outside China are higher for longer, capital outflow pressures are likely to persist.”

Julian Evans-Pritchard, head of China economics at Capital Economics, said the unusually large gap in interest rates “has prompted companies to shift their retained earnings outside the country.”

Although we see little evidence that foreign companies are, in aggregate, reducing their presence in China, we believe that rising geopolitical tensions, at least in the medium term, will hamper China’s ability to attract foreign direct investment and favor rather It is emerging markets that are still in a better position. “More friendly with the West.”

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Thanks to foreign direct investment outflows, China’s primary balance – which includes current account balances and direct investment and is more stable than volatile portfolio investment – ​​ran a deficit of $3.2 billion, the second quarterly deficit on record.

“Given these unfolding dynamics, which are poised to put pressure on the Chinese yuan, we expect a sustained strategic response from the Chinese authorities,” wrote Tommy Shih, head of Greater China research at OCBC.

Onshore yuan trading against the dollar also hit a record low volume in October, official data showed, highlighting intensified efforts by authorities to curb yuan selling.

Xie expects the Chinese central bank to continue countercyclical interventions – including a strong daily fixing bias for the yuan and management of yuan liquidity in the offshore market – to support the currency in the face of these headwinds.

The latest data shows that local yuan trading volume against the dollar fell to a record 1.85 trillion yuan ($254.05 billion) in October, down 73% from the August level.

Sources told Reuters that the People’s Bank of China urged major banks to limit trading and persuade customers to exchange the yuan for the dollar.

Goldman Sachs data showed that foreign exchange inflows from China rose sharply in September to $75 billion, the largest monthly figure since 2016.

($1 = 7.2819 Chinese yuan)

Reporting by Shanghai newsroom; Edited by Shri Navaratnam and Emilia Sithole-Matarise

Our standards: Thomson Reuters Trust Principles.

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