What makes China’s latest wave of foreign capital withdrawal different? It’s structural

Trade war, rising costs and economic reforms deemed too little, too late are behind China’s latest foreign capital flights
What is different this time is that the withdrawals are part of a migration of the industrial chain out of China

Chen GongandYu Zhongxin

Published: 3:00am, 29 Jul 2019

Why you can trust SCMP

With the outbreak of the trade war with the United States and the imposing of US tariffs, China’s foreign trade and investment environment is facing great changes. Some foreign investors have chosen to withdraw to avoid tariffs and evade sanctions.

At a July 11 news conference in Beijing, commerce ministry spokesman Gao Feng said he had noticed reports of affected business confidence at some foreign firms in the country but that the government will continue to safeguard the business environment.

In China, the number of enterprises with foreign investment and the overall scale of foreign capital have yet to decrease significantly.

But the withdrawing of large foreign companies is becoming noticeable. South Korea's Samsung and Japan's Olympus and Epson have closed many of their factories in China and may withdraw completely from the Chinese market. Carrefour is beating a retreat, along with Tesco and Wal-Mart, in selling significant stakes in its Chinese operations.

The scale of foreign investment in high-end manufacturing is shrinking fast, according to our analysis, and there is almost no new investment in some Shanghai industrial parks.

China is not without its advantages in attracting foreign investment; its massive and constantly upgrading market is its biggest draw. After decades of rapid development, China has a gross domestic product of over 90 trillion yuan (US$13 trillion), and per capita GDP exceeding US$9,600, meaning a large and growing middle class.

China has huge consumption potential, and could very well become a strategic market. For foreign investors, China is very appealing.

And China is working to become even more appealing, having opened up more of its economy to foreign investment over the last two years.

Most recently, the government decided to further liberalise the financial industry by lifting the caps on foreign ownership in securities, futures and life insurance from 2021 to 2020.

On the other hand, investing in China is increasingly expensive, as costs rise for labour, land, environmental management and other business factors.

Over the past decade or so, China’s average wages in manufacturing, adjusted for productivity, have tripled. Taxes, including social security charges, have soared along with energy prices, and the yuan has strengthened. These have chipped away at China’s reputation as the world’s factory.

With the added strain of US tariffs, many foreign enterprises in China find that their products are not longer competitive.

Furthermore, China, as a trade war target, now also carries long-term geopolitical risks. Since last year, when the trade war was declared, many foreign investors have started to shift production capacity out of China – a restructuring of the global supply chain that has a structural impact on China's investment environment.

The pace of economic reform in China is also a factor. Some foreign investors feel that China has made many promises over the years but delivered few of them.

There are those who believe that although China has clarified restrictions on its negative list, there are still restrictions on foreign investment in many industries, particularly in finance.

For now, the total amount of foreign capital attracted by China has not decreased, but the deterioration of the trade and investment environment has given rise to a structural withdrawal of foreign capital, and the consequent migration of the industrial chain also brings about a significant impact.

The opening up and prospective prosperity of China's market cannot be achieved without the participation of foreign capital.

The capital, technology, markets, management and brands brought in by foreign investors have boosted China's economy and should continue to play a part in its future.

Chen Gong founded Anbound, an independent think tank headquartered in Beijing, in 1993, and is its chief researcher. Yu Zhongxin has a PhD from the School of Economics, Renmin University of China, and is a researcher at Anbound

Post