In what looks like one of the most concrete manifestations of the “China-plus-one” sentiment in the global economy, China’s foreign direct investment (FDI) flow turned negative in the July-September quarter for the first time since 1998, the earliest period for which this data is available. While the Chinese state media maintained a brave face and reiterated that China continues to be a major global FDI destination, this trend, if it persists, could open new opportunities for many emerging market economies including India.
The China-plus-one approach refers to potential investors hedging their bets by keeping an additional supply chain source to avoid over-reliance on the Chinese manufacturing ecosystem.
China’s direct investment liabilities were a deficit of $11.8 billion in the quarter ending September, as per preliminary balance of payment data according to a Reuters report. In simple terms, the data means that FDI coming into China was lower than the FDI which has flown out of the country. Most experts believe this to be a manifestation of worsening sentiment among global firms vis-a-vis the business and investment climate in China on account for greater state intervention in the domestic economy and rising geopolitical tensions with advanced countries especially US.
China’s official media tried to underplay the numbers, terming it as a reflection of global economic turbulence. “FDI fluctuations are not uncommon for any country. It should be noted that the global environment for international business and cross-border investment remains challenging, and downward pressure on global FDI is expected to continue this year after a 12% decline last year,” a Xinhua report published on November 2 said, adding that “China remains one of the most attractive destinations for global investors thanks to its consistent opening-up drive bolstered by favourable policies.”
Independent experts, however, had a different view. “Probably this reflects foreign firms repatriating earnings from China, whereas previously they reinvested them,” a Bloomberg report quoted Duncan Wrigley, chief China economist at Pantheon Macroeconomics, as saying. “International firms, especially US ones, have been reconfiguring supply chains to use alternatives to China,” Wrigley added.
“We do think that, over the medium-term at least, increasing geopolitical tensions will hamper China’s ability to attract FDI and instead favour emerging markets that are more friendly to the West,” Julian Evans-Pritchard, head of China economics at Capital Economics told Reuters while adding that he saw “little evidence that foreign companies are, on aggregate, reducing their presence in China”.
A government of India official, requesting anonymity, described these numbers as a welcome sign for India. “This is a certain sign that foreign investors are losing confidence in the Chinese economy. The situation was accentuated by the supply-chain disruptions during the Covid-19 pandemic. Unreliable supply-chain and lack of confidence in the autocratic government forced multinationals to adopt China-plus-one strategy. India is naturally a gainer in this transition because of following factors – vibrant democracy, robust economy, stable government, rule of law, demographic dividend ensuring supply of economical and skilled labour force, modern IT-enabled infrastructure, and a vast market.”