Economic Meltdown: China Faces Capital Outflow
The resort city of Qingdao located on the coast of the Yellow Sea Source: AP/Alexei Druzhinin
For the first time in twenty-five years, Foreign Direct Investment (FDI) into China has fallen below zero. That is, there is more capital currently leaving China for other markets, than there is foreign capital being invested into China, a phenomenon called capital outflow.
Earlier this week, CNN Business reported that “direct investment liabilities, a measure of FDI, stood at minus $11.8 billion in the third quarter [of 2023].” This is in contrast to the third quarter of 2022 where Chinese FDI stood at a surplus of $14.1 billion, equating to a $25.9 billion loss in FDI over just the last fiscal year.
This downturn in foreign investment comes amidst a wave of faltering Chinese economic prospects. Since the outbreak of Covid-19 three years ago, the Chinese economy has yet to fully recover to pre-pandemic growth levels apart from the short-lived 2021 economic boost that came after the economy reopened.
In 2022, Chinese GDP grew a mere 3 percent, well short of Beijing’s 2022 target of 5.5 percent and far below China’s pre-covid 2019 growth rate of 6.1 percent. Due to China’s harsh Covid lockdown policies, shrinking working-age population, and increasing geopolitical tension with the US (China’s largest trading partner), many foreign firms have been withdrawing capital from China in an effort to diversify supply chains in other countries.
As a result of this, China has looked to stimulate growth through debt as a substitute for FDI, further inflating China’s gigantic debt burden to a whopping 280% debt-to-GDP ratio, for reference, the US’ infamous debt-to-GDP is only 121.6%.
The economic slump is not only a topic for discussion in Beijing, but a real issue being felt by the Chinese masses. According to CNN, “a September survey by the American Chamber of Commerce in Shanghai showed that only 52% of respondents were optimistic about their five-year business outlook, the lowest level since the survey began in 1999. That compares with 55% in 2022 and 78% in 2021.”
A Chinese investor monitors stock prices at a brokerage house in Beijing Source: AP Photo/Mark Schiefelbein
The recent capital outflow and general economic decline have prompted some China analysts to posit whether China is currently peaking or has already peaked in power. According to the UN, China has already reached its maximum population and is now seeing a yearly population decrease.
According to Tufts University professor and author Michael Beckley, this equates to a loss of “an entire France of workers while gaining an entire Japan of senior citizens” due to the rapid aging and lack of births within China. Furthermore, China’s annual economic growth is forecasted to slow to 3.5% by 2030 and just 1% annually by 2050. Many experts have also pointed to China’s recent discontinuation of publishing youth unemployment data as another red flag.
Yet, the Chinese economy is still far from all doom and gloom. China still boasts a manufacturing base equivalent to that of the USA’s and Europe’s combined. China also remains home to nearly 500 million rural inhabitants whose urbanization can lead to economic growth even in a time of population decline. Lastly, China’s “sluggish” GDP growth rate of 3 percent is only sluggish compared to past Chinese growth; China’s growth rate still remains very strong when compared to other developed economies.
The Chinese economy is still a behemoth on the world stage and remains the clear second largest in the world. However, the fall in FDI is nevertheless concerning, and while some pessimistic rhetoric around the Chinese economy may be overblown, some undoubtedly isn't. Much of the capital which once flowed into China originated in the US; therefore, US financial markets will keep a close eye on Xi Jinping’s upcoming visit to the US to see how Xi addresses worried American investors.