FDI into China dipped to $33 billion, the lowest since 1993. The good news is that China's FDI figure was positive, some analysts were predicting a negative FDI for the year with outflows outpacing inflows. South Korea, Taiwan, and Japan have all significantly slashed FDI into China. Germany seems to be the only advanced economy doubling down on China having made a record number of investments in the communist country last year. Some experts are accusing the CCP of data manipulation to give an illusion of stability suggesting things could be far worse than the numbers released indicate.
Foreign direct investment ("FDI") into China plummeted to a 30-year low in 2023, rattling the Chinese Communist Party ("CCP"), according to official data released on February 18, 2024. FDI on a net basis into China fell to $33 billion in 2023, down 80% from 2022. The good news is the inflows outpaced the outflows, some analysts were predicting a negative FDI for the year. The 2023 figure represents less than 10% of the FDI it received at its peak of $344 billion in 2021.
China's only solution, many observers predict, is to convert from a top-down authoritarian structure to one driven by demand-driven factors. Charlene Chu, managing director and senior analyst at Autonomous Research doubts this is possible:
"I don't even know that it is possible to move to a private, domestic, demand-driven economy in China, given how it directly conflicts with the top-down manner in which the party typically manages the economy... It would take a sea change in thinking."
Chu's skepticism reflects a wider concern among analysts about China's ability to reform its economy. American companies such as Apple, Nike and Starbucks have been loyal agents of the CCP and adhered to all its dictates to gain access to the elusive Chinese market. Those bets may soon turn out to be losers and tarnish the reputations of these once-great companies in markets in the more advanced economies in the West. China is facing outgoing FDI, diminished domestic support politically, demographic constraints caused from the shortsighted one-child policy, and other elements that point towards a Chinese economy too far in the hole to recover to its former greatness from just a few years ago.
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From Real Estate to Industrial Sector Collapse in 2024
The real estate collapse in China in 2023 was the big story, but this year's collapse of the industrial and manufacturing sectors will eclipse those. Manufactured exports make up between 18% and 24% of China's annual GDP. The official data from the Chinese Customs Bureau noticeably diverges from the import data from the corresponding countries' import data. This indicates that one side may be fabricating data, and most experts contend that it is China that is materially overstating how much it is shipping abroad. Profits of foreign industrial firms in China dropped 6.7% in 2023 from 2022, according to the Nation Bureau of Statistics data.
What could drive the CCP to overstate export figures? It all comes down to a fear of showing any signs of instability. The Chinese economy and society, many experts point out, are built on a house of cards that collapses as soon as prospects of double-digit growth go from reality to pipedream. Manipulating data may help China contain its domestic population, but international investors are wise to these tactics and this is likely why they have voted with their feet and decided to place their dollars in other markets.
Foreign Firms Are Responding To China's Potential Collapse
Foreign firms are opting to move their capital out of China to safer geographies. For starters, advanced economies have higher interest rates so risk-free returns are greater than in China which has been cutting rates. China is cutting rates to attempt to make its currency weaker to encourage exports, make loan obligations easier to meet, and in a desperate move to stimulate its falling economy.
A recent survey by Japanese firms showed they are likely to cut investments in China, or keep them steady, and most don't have a positive outlook for the country in 2024. Last year, only 2.2% of foreign investments from Japan went to China, a decade low. Similarly, Taiwan has cut investments into China with new investments the lowest since 2001. South Korean firms have followed suit with new FDI reduced 91% in the first nine months of 2023 compared to the same period in 2022.
The one country, seemingly, doubling down on China is Germany which had a record flow of FDI into China in 2023 of $13 billion.
The plummeting FDI into China signals a potential turning point, not just for the nation's economy, but for the global order. As the West distances itself from China and its authoritarian model, a new era of economic and political competition is taking shape. Whether China can adapt and navigate these turbulent waters, or succumb to the weight of its own contradictions, remains a defining question.
