Sharp Decline in Investment in China: Can Beijing Overcome Slump with Authoritarian Policies?

Editorial

14:59 JST, February 29, 2024

If China continues to manage its policies in an authoritarian and opaque manner, foreign investment is only likely to continue to flee the country. The Chinese government needs to take the current situation seriously.

According to China’s balance of payments report for 2023 released by the Chinese government, direct investment by foreign companies in China totaled $33 billion (about ¥5 trillion), a decrease of 80% or over from 2022.

This is the lowest level in 30 years, since 1993, and represents a sharp decline from the 2021 peak of $344.1 billion to less than one-tenth in just two years.

The amount of direct investment is the amount of funds newly invested in China by foreign companies for such purposes as acquiring local companies or building new factories after the amount withdrawn due to exits from or downsizing in business in China is deducted.

China had achieved a high degree of growth as “the world’s factory” by receiving investment from abroad and developing its manufacturing industry. This large a decline in the value of investment will probably have a major impact on China’s economic management.

One factor contributing to the significant decrease in direct investment is China’s economic slump. The Chinese government has been unable to take effective countermeasures amid the prolonged real estate recession.

Intensifying confrontation between the United States and China is causing companies around the world to reevaluate their supply chains and move their factories outside China. These moves may also have affected the foreign investment.

Furthermore, there are strong concerns about the opacity around the application of the counterespionage law.

A Japanese employee of Astellas Pharma Inc. was arrested on suspicion of violating the law in October, but no detailed reason for the arrest has been provided.

China had revised the law in July, expanding the scope of the definition of espionage activities to include the theft of information related to “national security and interests.”

However, it is unclear what specific cases apply under the law. Foreigners will not be able to work with peace of mind if they are held liable for violating the law even in the course of normal business research.

In a survey conducted by an organization of Japanese-related companies operating in China, almost half of the respondents answered that they “would not” invest or “would reduce” their investment in China in 2023. Japanese companies are also hesitant to invest in China.

The Chinese administration of President Xi Jinping is said to be prioritizing measures for national security over the economy. But if the economic slump continues, there is a risk of social instability. A sharp decline in foreign investment could accelerate the economic trend.

China is Japan’s largest trading partner and an important market for Japanese companies. If the economic downturn in China worsens, the impact on Japan will also be significant.

It is hoped that the Xi administration will face up to the decline in foreign investment and begin to improve the situation to create an environment conducive to investment by foreign companies.

(From The Yomiuri Shimbun, Feb. 29, 2024)