Explained: Why foreign businesses are pulling out money from China at such a fast rate?

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Amid China’s slowing economy, geopolitical tussle with the United States and low interest rates, foreign businesses have started pulling money out of the market of China at a faster rate compared to what they have been putting in, as per official data.

The country’s economic potential has been placed in a cloud of doubt amid its deteriorating relations with the United States. As the world’s gaze remains on the crucial meeting to be held between US President Joe Biden and Chinese leader Xi Jinping, businesses are already appearing to move with caution.

“Anxieties around geopolitical risk, domestic policy uncertainty and slower growth are pushing companies to think about alternative markets,” stated Nick Marro from the Economist Intelligence Unit (EIU), while speaking to BBC.

In the last three months, a deficit of nearly $11.8 billion (£9.6bn) has been recorded by China in foreign investments till the end of September. This is the first time the country has recorded such deficits since the records started being maintained in 1998.

This further suggests that the profits are not being reinvested by foreign companies in China, but are rather being pulled out of the country.

Chinese economy to witness growth or dip?

Swiss industrial machinery manufacturer Oerlikon’s spokesperson stated, “China is currently facing slower growth and needs to make some corrections.” The company had pulled out $277 million from the country last year.

“In 2022, we were one of the first companies to transparently communicate that we expect the economic slowdown in China to impact our business. Consequently, we began early to implement actions and measures to mitigate these effects,” the spokesperson added, as reported by BBC.

China has been a major market for the firm. It had nearly 2,000 employees across the country which brought more than a third of its sales.

However, Oerlikon stated that the Chinese economy is still likely to grow by nearly 5 per cent in the next few years, “which is among the highest in the world.”

Since the pandemic, businesses have been facing challenges in their operations in the biggest market of the world due to the strictest lockdowns and the country’s “zero-Covid” policy.

The stringent rules have also led to disruption in many companies’ supply chains, especially Apple which was manufacturing most of its iPhones in China. Since then, the firm has been diversifying its supply chain and shifting some production to India.

As per Marro, the companies have been considering diversification because of escalating tensions between the United States and China amid the imposition of export restrictions on raw materials and technology which is required for producing advanced chips.

“We aren’t seeing many companies pulling out of China. Many of the big multinational firms have been in the market for decades, and they’re not willing to give up the market share that they’ve spent 20, 30 or 40 years cultivating. But in terms of new investment, in particular, we are seeing a reassessment,” he stated.

Impact of low-interest rates making businesses take a U-turn?

Businesses have also been taking into account the impact of low interest rates. China also followed the trend of increasing rates sharply last year, just like other countries.

Many major central banks, which include the European Central Bank and the US Federal Reserve, have increased their interest rates to tackle inflation. The increased cost of borrowing, which also gives higher returns, attracts foreign capital to the country.

However, the country’s policymakers have decreased the cost of borrowing to support its economy and real estate industry. This year, their currency yuan saw a depreciation of more than 5 per cent against the euro and dollar.

The European Union Chamber of Commerce in China has stated that businesses are spending the money and not reinvesting the earnings made from the Chinese market back in the country.

WATCH | Foreign companies exit China, companies rethink China investments | World DNA

“Those with excess cash and earnings in China have been increasingly transferring these funds overseas, where they will earn a higher investment return compared to investments in China,” it added.

Is uncertainty looming in China’s financial future?

As per analysts, there is much uncertainty over the China-US ties and the country’s interest rates. The central bank of China can move to decrease interest rates further this year for supporting its dwindling economy, stated Dan Wang, the chief economist of Hang Seng Bank China.

If the interest rates are lowered, it will place more pressure on their currency.

“There is very limited room for monetary easing right now because of the pressure of currency depreciation. If economic sentiment improves next month, it’s safe to say that China will lower interest rates. But if sentiment doesn’t improve, the central bank will have a very difficult decision to make,” she stated, as reported by BBC.

Meanwhile, Marro hinted about businesses remaining cautiously optimistic about the meeting between Presidents Biden and Xi.

“Direct meetings between the two presidents tend to exert a stabilising force on bilateral ties. We have also seen a flurry of US-China diplomatic engagement over the past couple of months, which has contributed to this feeling that both sides are aiming to put a floor under the relationship,” he stated.

(With inputs from agencies)

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