China has suffered its first-ever quarterly deficit in foreign direct investment during the July to September period.
Preliminary data on China’s balance of payments released late on Friday showed direct investment liabilities was a deficit of $11.8 billion in the third quarter of this year.
This was the first quarterly shortfall since China’s foreign exchange regulator began compiling the data in 1998, which could be linked to the impact of “de-risking” by Western countries from China amid growing geopolitical tensions.
It shows the challenge that Beijing faces attracting foreign investment, although interest rate differentials between China and the US have also been cited as a factor.
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Foreign direct investment (FDI) in China has plunged by double-digit amounts in every month since May and fell by 34% in September, according to a report last week by the Financial Times.
Western calls to “de-risk” supply chains had driven a decline in foreign investment that was at a two-decade low, it said, adding that calculations based on Commerce Ministry data compiled by Wind showed FDI fell by over a third to 72.8 billion yuan ($10 billion) in September, which was the “biggest decline since monthly figures became available in 2014.”
Capital outflow pressures
Goldman Sachs said: “Some of the weakness in China’s inward FDI may be due to multinational companies repatriating earnings,” adding that China’s interest-rate differentials with developed countries also played a part.
“With interest rates in China ‘lower for longer’ while interest rates outside of China ‘higher for longer’, capital outflow pressures are likely to persist.”
As a result, China’s basic balance – which encompasses current account and direct investment balances and are more stable than volatile portfolio investments – recorded a deficit of $3.2 billion, the second quarterly shortfall on record.
“Given these unfolding dynamics, which are poised to exert pressure on the RMB, we anticipate a sustained strategic response from China’s authorities,” Tommy Xie, head of Greater China Research at OCBC wrote.
Record low yuan-dollar trading last month
Onshore yuan trading against the dollar also hit record-low volume in October, official data showed, highlighting authorities’ stepped-up efforts to curb yuan selling.
Xie expects China’s central bank to continue counter-cyclical interventions – including a strong bias in daily yuan fixings and managing yuan liquidity in the offshore market – to support the currency in the face of these headwinds.
Latest data shows that onshore volume of yuan trading against the dollar slumped to a record low of 1.85 trillion yuan ($254.05 billion) in October, a 73% drop from the August level.
The People’s Bank of China has urged major banks to limit trading and dissuade clients to exchange the yuan for the dollar, sources have told Reuters.
In September, foreign exchange outflows from China rose sharply to $75 billion, the biggest monthly figure since 2016, Goldman Sachs data showed.
The dollar was trading at a value of about 7.2819 yuan on Monday.
- Reuters with additional editing by Jim Pollard
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