China’s First-Ever Quarterly Deficit in Foreign Direct Investment Reflects Global ‘De-Risking’ Challenges

This quarter's deficit holds the distinction of being the first since China's foreign exchange regulator began tracking this data back in 1998.

China has recently experienced a significant development in its foreign direct investment (FDI) landscape, marking its first-ever quarterly deficit in FDI, as indicated by balance of payments data.

This unprecedented occurrence sheds light on Beijing’s ongoing struggle to attract overseas companies, a challenge intensified by the global trend of “de-risking” initiated by Western governments.

During the period spanning from July to September, direct investment liabilities in China recorded a deficit of $11.8 billion, based on preliminary data from China’s balance of payments.

This quarter’s deficit holds the distinction of being the first since China’s foreign exchange regulator began tracking this data back in 1998.

Analysts speculate that this decline in inward FDI may be partially attributed to multinational corporations repatriating their earnings.

Additionally, China’s interest rate differentials with developed nations have played a role, with Chinese interest rates remaining comparatively low while those outside China have trended higher. This situation has led to sustained capital outflow pressures.

Consequently, China’s basic balance, which encompasses current account and direct investment balances and is generally more stable than volatile portfolio investments, reported a deficit of $3.2 billion, marking the second quarterly shortfall ever recorded.

In response to these evolving dynamics and their potential impact on the Renminbi (RMB), experts anticipate a strategic response from China’s authorities.

Tommy Xie, Head of Greater China Research at OCBC, envisions continued counter-cyclical interventions by China’s central bank.

These interventions may include a strong bias in daily yuan fixings and the management of yuan liquidity in offshore markets to bolster the currency in the face of these challenges.

Further reflecting the gravity of the situation, official data revealed that onshore yuan trading against the dollar reached record-low volume in October.

This underscores the Chinese government’s heightened efforts to curb yuan selling. In fact, the People’s Bank of China has encouraged major banks to limit trading and dissuade clients from exchanging yuan for the dollar.

As a concerning sign, September witnessed a sharp increase in foreign exchange outflows from China, totaling $75 billion, marking the highest monthly figure since 2016, according to data from Goldman Sachs.

These developments underscore the complexity of China’s economic landscape and its ongoing efforts to navigate the changing global investment environment.