During the pandemic, we heard many corporate leaders in the US and other developed countries talking about “near-shoring” or “friend-shoring” – the importance of having trade with countries that one could rely on during times of crisis. One wondered whether this was rhetoric or a foretelling of meaningful change ahead. Well, one can now see that change has indeed occurred. The chart below shows the movement of investment capital into China from other countries – and a change has certainly occurred.
Last week brought the news that for the first time since China’s accession to the World Trade Organization in 2001, foreign direct investment (FDI) during the third quarter was outright negative.
Source: Bloomberg
The retreat of FDI from China has many good reasons, basically demonstrating the West’s loss of faith in China’s ability to deliver strong long-term returns to those investing. It is now the consensus amongst Western countries that Xi Jinping’s government is not a friend to business and does not at present offer the kind of stability and predictability that investors need. The pandemic demonstrated to everyone that there was something to be said for keeping supply chains short and geography matters. Chinese labour is no longer as cheap as it used to be, and one can get better value out of Mexican or Vietnamese workers. Lastly, the deterioration of relations with the US has deterred many investments for security reasons.
Of course, there will still be plenty of investment opportunities in China – it is after all the world’s second-biggest economy. But there is little doubt that the mood has soured. Nevertheless, China is home to a huge internal market of consumers, which will continue to encourage investment by foreigners, even if they no longer wish to use the country as a base for exports. But it’s hard to view this latest development as a positive for China. Perhaps that’s part of the reason China’s sharemarkets have performed so poorly this year.
Disclaimer: Clime Asset Management Pty Limited | AFSL 221146 | ABN 72 098 420 770. The information provided in this post is intended for general use only. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information contained therein. Please consider the relevant disclosure document/s before investing in one of our products. Investment in securities and other financial products involves risk. An investment in a financial product may have the potential for capital growth and income but may also carry the risk that the total return on the investment may be less than the amount contributed directly by the investor. Investors risk losing some or all of their capital invested. Past performance of financial products is not a reliable indicator of future performance or returns.
