The White Rabbit; Let’s Talk FDI in China
The Year of the Rabbit is upon us and, according to the tradition of Lunar New Year, the Yin energy of the rabbit should foster rest, introspection and working smarter not harder. That’s certainly not the message conveyed by China’s Vice-Premier Liu He at Davos this week who declared, “Foreign investments are welcome in China, and the door to China will only open up further.” With the COVID-related lockdown only recently removed, Liu He wanted everyone (and by everyone, I mean the over 600 CEOs in the room) to view China as a good place to invest and reverse the decline of 2022. According to fDi Markets, the value of newly announced greenfield FDI projects in China fell to its lowest level in almost twenty years in the first half of 2022. The relatively high interest rates available in China in the 2020–2021 period weren’t as attractive once central bankers around the globe started raising rates to combat inflation. If investors come for the interest rates, they aren’t going to stay for the mixed fundamentals of higher COVID rates, property sector slowdown, high unemployment rates for young people, and declining birth rates.
Prior to this slowdown, FDI from Europe was concentrated in the sectors of autos, food processing, pharma/biotech, chemicals and consumer products manufacturing now making up nearly 70% of all FDI, compared to 57% in 2008–2012. However, supply chain problems created by China’s strict COVID-19 policies have led some multinationals to reassess the practice of offshoring manufacturing capacity. Supply chain diversification in sectors that have attracted large amounts of FDI in the past — electric vehicles, clean technology components, semiconductors — mean that overseas investors may look to other markets with more business-friendly policies and supports. However, with inflation maybe, perhaps turning a corner and tightening monetary policy by many central banks coming to an end, many investors may let the dust settle a bit and crouch rabbit-like in their warrens until the spring when the shoots of economic growth are present once again.
Kate Starr, Co-Founder & Chief Investment Officer
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