[1/2]People walk at the venue of the China International Import Expo (CIIE) in Shanghai, China November 6, 2023. Portal/Casey Hall ACQUIRES LICENSE RIGHTS
SHANGHAI, Nov 6 (Portal) – China posted its first quarterly deficit in foreign direct investment (FDI), according to balance of payments data, underscoring capital outflow pressures and Beijing’s challenge to deter foreign companies as it “de-risks” a move by Western governments.
Direct investment liabilities – a broad measure of foreign direct investment that includes the retained earnings of foreign companies in China – showed a deficit of $11.8 billion in the July-September period, according to preliminary balance of payments data.
That’s the first quarterly deficit since China’s foreign exchange regulator began compiling data in 1998, which could be related to the impact of Western countries’ “de-risking” of China as well as China’s interest rate disadvantage.
“Part of the weakness in foreign direct investment in China may be due to multinational companies repatriating profits,” Goldman Sachs wrote.
“As interest rates in China are ‘lower for the longer term’ while interest rates outside of China are ‘higher for the longer term’, capital outflow pressures are likely to continue.”
Julian Evans-Pritchard, head of China economics at Capital Economics, said the unusually wide interest rate gap had “prompted companies to send their retained earnings overseas.”
Although he sees little sign of foreign companies overall reducing their presence in China, “we believe that increasing geopolitical tensions will, at least in the medium term, impact China’s ability to attract foreign direct investment and instead favor emerging markets friendlier to the West.”
Due to FDI outflows, China’s basic balance – which includes current account and direct investment balances and is more stable than volatile portfolio investment – posted a deficit of $3.2 billion, its second quarterly shortfall on record.
“With these unfolding dynamics likely to put pressure on the RMB, we expect a sustained strategic response from the Chinese authorities,” wrote Tommy Xie, head of Greater China Research at OCBC.
Official data showed that onshore yuan trading against the dollar also hit a record low in October, underscoring authorities’ increased efforts to curb yuan selling.
Xie expects China’s central bank to continue its countercyclical interventions – including a strong focus on daily yuan fixings and managing yuan liquidity in the offshore market – to support the currency in the face of these headwinds.
Latest data shows that the yuan’s onshore trading volume against the dollar fell to a record low of 1.85 trillion yuan ($254.05 billion) in October, down 73% from August levels.
The People’s Bank of China has asked major banks to restrict trading and discourage customers from converting the yuan into the dollar, sources told Portal.
In September, foreign exchange outflows from China rose sharply to $75 billion, the highest monthly figure since 2016, Goldman Sachs data showed.
($1 = 7.2819 Chinese Yuan Renminbi)
reporting by the Shanghai newsroom; Edited by Shri Navaratnam and Emelia Sithole-Matarise
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