With the outbreak of the U.S.-China trade war, the United States not only imposed high tariffs on Chinese goods, but also suppressed and sanctioned Chinese companies. This has caused great changes to China's foreign trade and investment environment. Faced with these changes, some foreign investors have chosen to withdraw from China in order to avoid tariffs and evade sanctions. In particular, with the long-term trade friction ongoing between the United States and China, the impact on foreign investment will also play out on long-term, which will further increase the pressure on the withdrawal of foreign capital.
On July 11, the Chinese Ministry of Commerce published data showing that the actual use of foreign capital in China increased steadily in the first half of the year. From January to June, the number of newly established foreign enterprises in the country was 20131. The actual use of foreign capital in this period was RMB 478.33 billion, representing a year-on-year increase of 7.2%. In the month of June, the actual use of foreign capital was RMB 109.27 billion, an increase of 8.5%. At the same time, China's Ministry of Commerce spokesman Gao Feng also said that "trade friction has indeed affected the investment confidence of some foreign enterprises in China, and some of them are worried about retaliatory measures. However, the Chinese government is actively helping these enterprises to resolve issues faced by them. At present, there is no large-scale foreign capital withdrawal in China."
Based on the official statistics, although the number of foreign enterprises and the scale of foreign capital in China have not decreased significantly, this does not reflect the presence of structural changes. There is large-scale foreign capital that has withdrawn or is withdrawing from China, which includes Korean, Japanese and Taiwanese manufacturing enterprises. In the consumer sector, foreign-investment enterprises like Carrefour and Wal-Mart are also withdrawing from China. Against the backdrop of the current global trade war and the deterioration of the investment environment, China needs to pay more attention on the withdrawal of foreign capital and their related impacts. This is not simply about an increase or decrease of foreign investment statistics, but rather involves multiple issues that include situational judgment, policy environment, and foreign investment. The level of foreign investment in China also affects the confidence of the Chinese market and has a demonstrative effect on the future.
Anbound's researchers believe that a comprehensive analysis of China's current foreign investment environment should include both positive and negative factors. From the perspective of factors conducive to foreign investment, the huge and constantly upgrading Chinese market would be the biggest drawing factor for China to attract foreign investment. After decades of rapid development, China's current GDP now exceeded RMB 90 trillion and its per capita GDP exceeded US$ 9,700, bringing with them a growing middle class. This means that China has huge consumption potential, and could very well become a strategic market. For institutions, this is also China's biggest bargaining chip and appealing reason for attracting foreign investment.
In addition, the basic policy of expanding and being more open is attractive to foreign investors. China has strategically adhered to its efforts of opening-up to the outside world. In the past two years, it has continuously increased the scopes and sectors for foreign investment. Recently, the Chinese government decided to deepen the opening-up of the financial industry, and moved up the lifting of foreign ownership caps in securities, futures and life insurance from 2021 to 2020. The National Development and Reform Commission (NDRC) also issued a 2019 version of the negative list of foreign investment, further reducing the length of the negative list. Among them, the number of negative foreign investment entry list was reduced from 48 to 40, with a reduction ratio of 16.7%. Meanwhile, the foreign investment admission negative list in the Pilot Free Trade Zone is reduced from 45 to 37, a reduction ratio of 17.8%.
Finally, China's capital market is also opening-up, and multiple indices are including the Chinese markets, which in turn allows more foreign investors to participate in China's financial markets. On March 1 this year, Mingsheng Inc. (MSCI) announced that it will increase the weight of China A-shares in the MSCI Index and increase the China A-share inclusion factor from 5% to 20%. On June 21, A-shares were officially included in the FTSE Russell Global Equity Index Series. In addition, since April this year, Bloomberg officially included Chinese bonds in the Bloomberg Barclays Aggregate Index.
Despite the above-mentioned favorable factors for attracting foreign investment, unfavorable factors are also increasing rapidly. Among them, the biggest disadvantage is the increase in costs. China's labor, land, environment and other related costs have risen, and investment in China has become increasingly expensive. In the past decade or so, China's average manufacturing wages, adjusted for productivity, have tripled. Other than that, taxes including social security charges soared, energy prices rose rapidly, and exchange rates appreciated. These have changed the comparative advantage of China as the "world factory." A study by the Boston Consulting Group (BCG) three years ago found that China's average direct production cost in 2004 was 6% lower than in Mexico, and by 2014 Mexico was 4% lower than in China. At this stage, the current average manufacturing cost in China is only about 5% lower than in the U.S. This has led many companies to relocate their factories to Southeast Asian countries such as Vietnam, where production costs are lower.
China is the main target of the trade war, which causes foreign investment in China to face geopolitical risks. The long-term nature of the trade friction also makes geopolitical risks something that will persist for the long-term. Since last year, many foreign investors have been shifting production capacity out of China, partly because of the pressure of rising production costs and partly because of the risk of a trade war between China and the United States. Because of the high tariffs imposed by the United States on Chinese products, many enterprises have lost the competitiveness of their products. U.S.-China trade frictions are not only showing signs of becoming protracted, but also spreading its impact to other areas. As Anbound has previously pointed out, the trade war between U.S. and China has escalated beyond its initial stage to become an all-out corporate and financial war. Risk factors have also changed the expectations of foreign investors and they have begun to shift production out of China. The transfer of partial industrial chain and the restructure of the global supply chain have both brought structural impacts to China's investment environment.
The impact of China's reforms is also affecting expectations of foreign investors. Some foreign investors said that China has promised many things that seem right over the years, but only a few have been implemented. "We don't need new commitments, we need reforms," says one. There are also foreign investors saying that although China has clarified restrictions on its negative list, there are still some restrictions on foreign investment in many industries that are not included in the list, especially those in the financial industry. To some foreign investors, this shows that what China says is different from what it actually does. Foreign investors have also complained about intellectual property protection measures and the "Market for Technology" policy in China.
Final Analysis Conclusion:
Although the total amount of foreign capital attracted by China has not decreased, the deterioration of the trade and investment environment has given rise to a structural withdrawal of foreign capitals, and the consequent migration of the industrial chain also brings about a significant impact. The opening and prospective prosperity of China's market cannot be achieved without the participation of foreign capital. The capital, technology, market, management and brands brought around by foreign capital have not only boosted China's economy in the past, but also should continue to be a part of China's economy in the future.
