Investors Are Fleeing China - One Data Point Went Negative For First Time Ever

China saw its first-ever quarterly deficit in foreign direct investment, indicating pressure from capital outflows, from July to September. Two key reasons appear to be causing this trend reversal for the second-biggest economy in the world.

Preliminary BoP data published by the State Administration of Foreign Affairs showed that there was a $11.8 billion deficit in direct investment liabilities, a broad indicator of foreign direct investment that includes retained earnings in China by foreign corporations. This is the first quarterly deficit since the data was first compiled in 1998 by China’s foreign exchange regulator.

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Two key reasons are being widely believed to be responsible for foreign investors being wary of China for the majority of this year.

Vast Interest Rate Differential

“Some of the weakness in China’s inward FDI may be due to multinational companies repatriating earnings,” Goldman Sachs stated. The investment bank believes that interest rates in China remaining lower for longer versus outside China where they are higher for longer, is also contributing to capital outflow pressures and are likely to persist.

Capital Economics’ Head of China Economics Julian Evans-Pritchard also believes that the vast interest rate differential is what has led firms to remit their retained earnings out of the country.

De-Risking By The West

Another key reason highlighted for the pressure on capital outflows and Beijing’s difficulty in courting foreign firms is the “de-risking” initiative by Western governments.

According to a note from Nicholas Lardy, senior researcher at the Peterson Institute for International Economics, the data suggests that foreign companies are selling their current investments and bringing money back home in addition to declining to reinvest earnings.

He went on to say that this trend might further devalue the yuan and limit China’s potential for economic growth.

According to official data, onshore yuan trading volume against the dollar also reached a record low in October, underscoring the authorities’ increased efforts to limit yuan selling.

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