Competition and uncertainty: Xi Jinping on edge

China suffers from a drain of highly skilled labor and losses from foreign investment. The conflict in Ukraine has affected the situation in the country.

Demand for Chinese goods is weak. Foreign companies continue to move their supply chains elsewhere. Even figures for activities such as student exchange programs and tourism are falling.

Signs of historically low foreign investment in China are everywhere. Other notable aspects include the crisis in the construction sector, high government debt, high unemployment rates and the like. There are many reasons for this situation, but they all boil down to one key point: China's economy remains weak, and foreigners no longer feel safe financially or even physically in the country.

How bad a sign is the outflow of foreign investors? Short answer: very bad.

Last month, analysts expected Beijing to announce weak inward foreign direct investment, but even pessimists were shocked. According to data from the State Administration of Foreign Exchange, direct investment commitments for the period from July to September reached a deficit of $11.8 billion. Such quarterly deficit figures were recorded for the first time in China.

Most analysts see the reason as investors wanting to “reduce risk,” but there are other additional factors that have worsened the situation.

“Foreign firms operating in China are not only refusing to reinvest their earnings, but - for the first time in history - they are large sellers of their investments to Chinese companies and are repatriating the funds,” comments Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics (USA).

As noted by Goldman Sachs (one of the largest investment companies in the world. Founded in 1869 with headquarters in Manhattan in New York - “Commander in Chief”), “since interest rates in China have been “low for a long time”, and With interest rates outside China "high for a long time," capital outflow pressure is likely to persist."

Listings of Chinese companies on US markets have fallen to incredible levels. Part of the reason for this is tensions between the US and China, which are causing investors to be more cautious.

Listing is the admission of securities to trading on a stock exchange or over-the-counter trading system and the implementation of preliminary and subsequent control over the compliance of securities and their issuers with the conditions and requirements established in the rules of the exchange or other trade organizer.
Chinese authorities have closed all foreign consulting and auditing firms in the country, which are vital for potential investors and foreign companies to understand risks and other corporate and political factors before making investment decisions.

Raids by Chinese security forces at the offices of several American companies, in particular Mintz Group and Bain & Co., with the subsequent detention of local personnel, did not help improve the investment climate.

Buying rates for shares of overseas-listed Chinese companies also fell to a 5-year low. By comparison, 34 Chinese initial public offerings in the U.S. raised $12.6 billion in 2021. Last year, that amount fell to $468 million from 14 IPOs.

Reasons include regulatory uncertainty and weak performance of Chinese companies at home. In addition, Western experts have long been unanimous in advising companies to “de-risk” their supply chains from China.

Things got so bad that on November 28, Chinese Vice Premier Li Qiang made a statement at the first China International Expo: “We are willing to build closer manufacturing and industrial supply chain partnerships with all countries.” He also added that foreign companies need to be “more careful about the challenges and risks caused by protectionism and uncontrolled globalization.”

Even the number of students going to China has dropped sharply. In 2019, more than 11 thousand Americans studied in China. This year the number is only 350, according to the US Embassy in Beijing. China is desperately trying to stop the outflow.

In August, China announced a 24-point plan to attract foreign investment and improve the business environment at home, particularly in key sectors such as technology and biomedicine. China said it would "expand foreign capital inflow channels that meet the interests of foreign investors," but did not provide specific details.

At the recent APEC summit in San Francisco, Chinese President Xi Jinping raised this issue: “We will further work to ensure national treatment for foreign investors.”

China will also improve policies to help foreigners enter and stay in the country, including removing barriers to financial, health and digital payment services, he said, but again did not provide details.

The problems are too big and the solutions China is trying to implement are too weak to achieve significant results, said Peter Petrie, a professor of international finance at Brandeis University.

“Uncertainty about the U.S.-China relationship is why many U.S. companies are pulling out of China, and it will take years to change that,” he said. “Nothing (of what China is now trying to implement - ed.) will solve its problems in the short term.”