China's foreign investment turns negative for the first time in over two decades

China's foreign investment landscape has taken an unprecedented turn as a key indicator of foreign investment has slipped into negative territory, marking the first such occurrence since records began in 1998. This decline underscores the trend of foreign companies divesting from China in the backdrop of geopolitical tensions and more attractive interest rates elsewhere.

China's balance of payments has witnessed a decline of $11.8 billion in the third quarter in terms of direct investment liabilities, as reported by the country's foreign exchange administration. This metric accounts for financial flows associated with foreign-owned entities operating within China.

Economists have pointed out that the decrease in foreign direct investment (FDI) by the balance of payments metric reflects a reduced willingness among foreign companies to reinvest their profits in China. This is attributed to strained relations with Western nations and the allure of retaining funds overseas, especially as advanced economies have been raising interest rates while China has been reducing them to stimulate its economy.

Duncan Wrigley, Chief China Economist at Pantheon Macroeconomics, suggested, "This likely reflects foreign firms repatriating their earnings from China, whereas previously they reinvested them. International firms, particularly those from the United States, have been restructuring their supply chains to explore alternatives to China."

China's other primary measure of foreign direct investment inflows, released by the commerce ministry, reached 920 billion yuan ($125.8 billion) during the first three quarters of this year, representing an 8.4% decrease compared to the same period in 2022. The decline in this metric is influenced by the depreciation of the Chinese currency relative to the US dollar in the current year.