China’s balance of payments, the statistic characterizing its international trade pattern, in the second quarter of this year is seeing contrasting trends as foreign direct investment (FDI) goes down, and outbound direct investment (ODI) goes up, according to official data.
The latest data from China’s foreign exchange authority shows China’s FDI turned negative in Q2 for the second time and hit a new low with a net outflow of US$14.8 billion in the second quarter of 2024. The first net outflow happened in Q3 2023 when overseas investors withdrew US$12.1 billion.
FDI has been a powerful engine driving China’s GDP growth for the past 30 years. However, the engine began to splutter in 2022, due to stringent Covid measures domestically and rising US interest rates abroad. Annual FDI that year totalled US$190.3 billion, a slump of 44.7% from the previous year. The figure kept going downward in 2023. Cumulative FDI in the first half of 2024 is still in the negative range.
Despite the downward trend, China remains committed to attracting FDI with a series of policy measures. A notice from the State Council earlier this year indicates that the new foreign investment directory, to be launched soon, will include the complete lifting of restrictions for foreign investors in the manufacturing industry, and the investment scope in the telecom and medical industries will be expanded.
With the interest rate hikes in the US expected to come to an end, an easing of monetary policy in China and favourable policies towards foreign investors, FDI in the second half is likely to bounce back.
While FDI is low, its flipside, Chinese ODI, has been on the rise in recent years as Chinese companies expand their footprints overseas. Data from the Ministry of Commerce shows Chinese ODI reached US$147.9 billion in 2023, marking a 0.9% increase year on year. The balance of payments also shows Chinese ODI in the second quarter of 2024 reached a new high of US$71 billion, representing an 82% rise from the same period in the previous year.
