China is experiencing a significant decline in foreign investment, reaching its lowest point since 1998. In the second quarter, foreign investment plummeted by 87%, totaling US$4.9 billion. The decrease in interest from overseas entities can be attributed to a combination of geopolitical tensions, domestic policy decisions, and skepticism surrounding China’s openness to global collaboration.
The escalating tensions between the United States and China have caused corporations to reconsider their investment strategies. A survey conducted by the American Chamber of Commerce in China revealed that 66% of member companies identified US-China relations as a primary business risk. The recent announcement by the Biden administration of tighter regulations on the semiconductors and artificial intelligence sectors, including new investments through joint ventures, has added to these concerns.
Furthermore, there is a broader skepticism regarding China’s willingness to engage with the global community. Confidence in China’s commitment to opening up over the next three years has declined from 61% to 34% among AmCham China’s members. The recently revised anti-espionage law, which expands the definition of espionage activities, has raised alarm among international businesses who fear their personnel may inadvertently become targets.
Internally, China’s economy is showing signs of fatigue. Despite abandoning the strict zero-COVID policy in January 2023, the anticipated momentum is missing. The real estate market, once booming, is now undergoing a recalibration phase, and prospects for private capital formation, including housing, appear bleak. Additionally, challenges such as declining labor force participation pose a further threat to growth.
China’s ambition to establish a domestic supply chain network, particularly in sectors like semiconductors, is facing obstacles. Dependence on foreign equipment and parts remains a challenge, and the broader economic stagnation may persist for longer than expected if technological innovation and productivity growth wane.
The repercussions of China’s slowing growth, as the world’s second-largest economy, are not isolated. The impact could ripple through global markets, affecting countries and businesses worldwide.
Following a Politburo meeting on July 24th, several policy announcements were made, although many lacked substantive details. While initiatives such as accelerated fiscal spending may provide a short-term boost to growth, investors eagerly await more concrete policy measures. Preliminary Q2 Balance of Payments data shows China’s financial account experiencing net outflows, further emphasizing the urgency of the situation.
Given the prevailing interest rate differences between the United States and China and subdued economic performance, currency exchange predictions suggest stability, with an expected 3-month forecast of 7.20 for USDCNY.
