How China is trying to attract more foreign capital

Rate of investment growth shows signs of declining as some companies pull out

As US-China trade frictions begin to ease, the odds for both countries to reach an initial agreement in the trade deal continues to strengthen, as does China’s positive perception towards foreign investment.

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In particular, it follows the events in which the country opened its financial market to the world, resulting in capital inflow for China.

According to statistics, foreign investors have increased their net holdings of China’s bonds and listed stocks in the first three quarters of the year by $71.3 billion and $18.5 billion respectively.

As of the third quarter, both net holdings of stocks and bonds possessed by foreign investors have since increased to 1.8 trillion yuan and 2.2 trillion yuan, an all-time high for both markets.

By the end of 2018, in terms of positioning, both markets are standing at a rate of 56.56 percent and 23.24 percent respectively.

 

Trade war

 

In the same year itself, China achieved a foreign direct investment (FDI) inflow growth of 4 percent, an equivalent of $139 billion in real economic terms and continues to be the world’s second largest capital inflow country.

Meanwhile, the actual utilisation of foreign capital relating to FDI too has increased by 2.9 percent.

While the statistics have indicated that FDI will continue to pour into China, the rate of investment growth show signs of declining as of result of the internal and external environmental changes happening within the country.

Given the inflow of China’s FDI and financial capital, many are optimistic that the country will continue to attract even more foreign investment.

In fact, Gao Feng of the China Ministry of Commerce further commented, “Undoubtedly, the conflicts arising from the trade war have affected certain parties’ level of confidence towards many foreign-invested companies in China.

“That said, the Chinese government is working hard to help the affected businesses resolve any matters they may have on hand. At present, a large-scale foreign capital withdrawal in China remains to be seen.”

 

Robust market

 

Head of Qualified Foreign Institutional Investor (QFII) Richard Pan of China Asset Management even believes that the decoupling of the US and China economy will not be much of a detriment to the country, seeing as global investors are beginning to increasingly embrace the robust financial market that China is.

Anbound, however, urged the government to not be overly confident in their forecast concerning China’s capital inflow and, instead, advised them to assess the matter from a more holistic angle, as so to ensure a much more objective judgment.

As far as FDI is concerned, the change in structure is just as important as the increase in its figures. A number of observations have shown that as China continues to see an increase in capital inflow, it will continue to experience a rise in the withdrawal of foreign industrial capital too.

A reason China is seeing an increase in its FDI is partially attributed to the involvement of large-scale investment projects. Take for example, BASF’s investment worth $100 billion and TESLA’s total investment of 500 billion yuan towards the country. As that continues to persist, many foreign traditional manufacturing, retail and high-tech electronics businesses, however, are increasingly pulling out from the Chinese market.

Mass exodus

 

Notable cases include the shutdown of Citroen, Samsung, LG and Intel factories and most recently, Japanese company Nitto Denko’s production factory in Suzhou.

On the retail side, retailers such as the French Carrefour and the US Walmart too are looking to exit the market. According to the reports from Nikkei Asian Review, companies such as Apple, HP, Dell and Microsoft are next in line to join the mass exodus of high-tech electronics companies from China.

The withdrawal of foreign investment is not just a result of the competition posed by domestic manufacturing but as well as the increase in labour costs and, more importantly, the increase in tariffs imposed by the US, all of which forces to export-oriented foreign investment to seek out countries with low investment cost to relocate their businesses.

As for FDI, China is currently experiencing a rapid growth in its investment market, making it a popular choice for the companies like TESLA and the likes of it to invest in the scene.

Anbound researchers previously pointed out that withdrawal of foreign capitals is largely caused by the increase in labour costs as opposed to the US-China trade war, which causes a high shift in the supply chain and demands a massive restructuring around the consumer markets involved.

 

Passive funds

 

As such, it is imperative that China regard the withdrawal of foreign capitals from the country with more seriousness.

Clearly, this not only concerns the change in figures pertaining to the FDI data, but the restructuring of the industrial chain, the level of confidence the world has towards China’s investment market and issues relating to domestic employment (in which 30 million job opportunities are provided by foreign-invested companies) among a series of rising problems.

Meanwhile, the increase of foreign investment is largely associated with China’s measures to further open its financial markets to the world.

As China’s investment market continues to expand, major investment index such as the MSCI Index will look to include A-Shares within its international indices, as is the case with Bloomberg’s inclusion of China’s bonds within the Bloomberg Barclays US Aggregate Bond Index, better known as Agg.

In turn, this spurs the continuous flow of passive funds and international capitals to the country.

 

Crucial strategy

 

As it stands, the act of opening its door and expansion of the investment market is a step towards the right direction, given that it is a crucial strategy for China to grasp in its intention to cause a turnaround in the passivity of the market.

With the implementation of such changes however, the withdrawal of financial capitals follows suit, given its fluidity, as is the case when China’s economy experiences turmoil.

As a result, this creates a rippling effect within the capital market, leading to greater concerns.

Clearly, there is a need to strengthen the regulation and supervision of securities in the market as so to continue ensuring the stability of the market as well as to prevent an economic bubble.

On the end of foreign investors, this forces them to change the way they perceive the Chinese market and policies, to pay further attention towards the need for a fair competition, intellectual property protection and an overall improvement within the business environment.

 

Changes, not promises

 

As such, China’s economic reformation may influence the investor’s expectation massively. In response to the changes, a number of foreign investors have expressed that, “What we need are changes, not new promises.”

In fact, the investors stressed that while China has a negative list, certain limitations still applies to various industries wherein foreign investment is concerned (for instance, financial sectors).

In addition to that, foreign investors have accused certain sectors in China of “demanding technology transfers in exchange for market access”.

Recently, the EU Chamber of Commerce in China (EU Chamber for short) has also stated that apart from detailing on its set of promises, it will provide a timeline pertaining to its reformation too. More recently, a survey conducted by the Shanghai Branch of the EU Chamber indicated that half of the transactions surveyed at the Shanghai Expo were completed in 2018, but 47 percent of the transactions were never executed.

 

‘Open-minded approach’

 

President of the American Chamber of Shanghai (AmCham Shanghai) Ker Gibbs has remarked that there are advantages to China’s recent attempt in opening up its market and reform measures, in particular, regarding State Council of China’s intention to improve the business environment and promote equal treatment although he noted, “The key lies in the execution.”

While data shows that the Chinese market is an attractive option for foreign investors, the rise in Chinese enterprise costs and the changes in the market are what deter investors from doing so.

In the long run, this would affect China’s goals of a sustainable development and acquisition of capital and technology for economic restructuring purposes. In light of that, it is imperative that China applies targeted measures towards policies concerning foreign investors and incorporate the act of reformation and the opening of the Chinese market together.

That said, it is still necessary that the government fully utilises the industrial chain, its strategic positioning of the market and infrastructure further draw in more FDI, which is what ultimately gives China the edge following demographic dividend and cost advantage.

On the other hand, from the perspective of a market construction, it is important that the regulations surrounding intellectual property rights and the relevant policies under the Foreign Investment Laws are strengthened, promote market access and discuss concerns surrounding foreign investment. All of which are not only benefit “upscale” business environments but the foreign investors and the domestic investment and innovation of the country too.

Aside from improving the aspects of sustainability and technicality of China’s economy development, the country intends to work on the environment, standards of policy as well as its service capacity, which is a form of policy capability.

All in all, the central government of China stresses that adopting an “open-minded” approach in its institution will lead to a “high quality” institution, therefore becoming a right fit for foreign investors.

The history in China’s development of the global economy signifies that the reformation, opening and the sustainable development of the economy are inseparable from the flow of foreign capital. Given the critical economic changes that China is experiencing within, particularly in its foreign capital, it is necessary that the Chinese government remains vigilant and maintain a holistic view so as to deal with the issues through targeted measures.

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