China experienced its first-ever quarterly deficit in foreign direct investment (FDI), as per balance of payments data, highlighting the challenges Beijing faces in attracting overseas companies due to Western governments’ “de-risking” efforts.
During the July-September period, direct investment liabilities, a measure of FDI, showed a deficit of $11.8 billion, according to preliminary data from China’s balance of payments. This marks the first quarterly deficit since China’s foreign exchange regulator began collecting such data in 1998 and could be associated with Western countries’ efforts to reduce the risk associated with investments in China, given growing geopolitical tensions.
Goldman Sachs suggests that part of the decline in China’s FDI may be due to multinational companies repatriating their earnings. Additionally, China’s interest rate differentials with developed countries are contributing to this trend. China’s interest rates are expected to remain low for an extended period, while rates outside of China are expected to remain higher, putting pressure on capital outflows.
Consequently, China’s basic balance, which includes the current account and direct investment balances, and is less volatile compared to portfolio investments, posted a deficit of $3.2 billion, the second quarterly deficit on record.
In light of these evolving dynamics and their potential impact on the Chinese Renminbi (RMB), experts like Tommy Xie, head of Greater China Research at OCBC, anticipate a strategic response from China’s authorities to address these challenges.