Since China opened to foreign investment in 1978 under Deng Xiaoping, global firms have ploughed in hundreds of billions of dollars to buy and build factories for market access and cheap labour, bolstering the Chinese currency.
A gentle downtrend in foreign direct investment gave way to a steep drop last quarter and inflows to China slammed to their lowest since records began 25 years ago, raising the prospect that the long-term trend is turning.
"But when that swings to a deficit, which is where it is right now ... that's a pretty big adjustment." Sources have told Reuters the Biden administration is likely to adopt new outbound investment restrictions on China in the coming weeks. Japan, the U.S. and Europe have already restricted the sale of high-tech chipmaking tools to Chinese companies while China has hit back by throttling exports of raw materials.
"I don't have one client wanting to invest in China. Not a single client," said John Ramig, partner at law firm Buchalter, who specialises in international business deals and structuring of manufacturing. Unlike more fickle portfolio flows from investors, companies' spending, while cyclical, tends to be stickier and steadier as firms establish and expand production -- meaning economic consequences are likely as it unravels.Dollar purchases via Chinese banks for outbound direct investment has consistently exceeded yuan purchases for foreign inbound investment this year, resulting in six consecutive months of outflows, according to latest SAFE data.
To be sure, investment flows often fluctuate and many firms aren't leaving China completely or aren't leaving at all.
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