Cooling off
The foreign exchange regulator's (SAFE) foreign direct investment (FDI) figures for 2023, published Sunday, paint a bleak picture.
The headline: FDI into China across the year totaled USD 33 billion, the lowest rate in two decades – with FDI down 82% y/y (Bloomberg).
But the figures are misleading.
SAFE reports on China’s “direct investment liabilities” – a broad measure of FDI that captures additional components beyond traditional investment inflows, including:
- Companies’ retained earnings
- Chinese overseas IPOs (through repatriated funds)
- Private equity investments
SAFE doesn’t provide a breakdown of its FDI data, but the plummeting headline figure is likely driven by these three components, exacerbated by:
- High US interest rates – incentivizing foreign investors to repatriate earnings
- Reduced appetite for offshore IPOs – after years of crackdowns and regulatory ambiguity
- A weakened RMB – increasing FX risks and future costs of repatriation
Foreign investment data from the commerce ministry (MofCom) – which provides a narrower gauge that only measures gross investment inflows – paints a rosier picture.
- Per MofCom, FDI in 2023 was down 8% y/y.
Get smart: The discrepancy between the SAFE and MofCom data suggests that 2023’s FDI drop was primarily driven by a short-term reallocation of retained earnings rather than a long-term exodus of foreign capital.
Get smarter: As China’s industry moves up the value chain and increasingly relies on homegrown innovation, the need for FDI as a source of financing and knowledge transfer diminishes.
The bottom line: The drop in FDI is unlikely to materially impact the macro economy, but it will exacerbate the lack of investor and business confidence