Welcome to “Pure Garden Finance & Economics”!
After the pandemic, the economic difficulties in China have become more severe. Not only foreign companies and investors are withdrawing from the Chinese market, but domestic enterprises and capital are also fleeing to seek investment and trade opportunities internationally. China’s outbound investment and international trade volumes hit new highs in the first half of 2024, but how far can this path go?
Chinese capital is currently facing significant challenges. On one hand, China’s domestic consumption market is in a deep slump, with not only personal consumption shrinking significantly, but local governments also lacking funds for investment and consumption. On the other hand, international tariffs on Chinese goods are on the rise. Additionally, the domestic capital market is in decline, while stock markets in countries like Japan, Taiwan, and elsewhere are reaching new highs, leading Chinese securities capital to seek opportunities abroad through various channels. This article only touches on the outbound investment funds of Chinese enterprises, without discussing securities capital and the massive gray capital flight.
Foreign investment accelerated its withdrawal in 2023. It was the first year in over a decade that foreign investment in China decreased. According to data from the Chinese Ministry of Commerce, the total amount of foreign direct investment decreased to approximately 1.13 trillion yuan (about 146 billion US dollars). According to the data from the Chinese government, the actual use of foreign funds in China in the first half of 2024 was 498.91 billion yuan, or less than 70 billion US dollars, a 29.1% year-on-year decrease, indicating an acceleration of foreign funds withdrawing.
According to the statistics of the Chinese Ministry of Commerce, as of the end of April 2004, China’s cumulative contracted foreign investment amounted to 990.13 billion US dollars. At that time, $1 trillion was more than 20 trillion dollars today. A report by the United Nations Conference on Trade and Development showed that in 2010, China attracted foreign investment exceeding 100 billion US dollars for the first time, ranking second globally and first among developing countries. Hong Kong, China attracted foreign investment to rank third globally for the first time. In the following decade, China continued to attract foreign investment of over a hundred billion dollars each year, becoming a darling of foreign capital and a major factor in China’s economic prosperity.
However, with the deteriorating performance of the Chinese Communist Party in Hong Kong, Taiwan, Xinjiang, and many human rights issues, the relationship between the CCP and the international community has sharply deteriorated, reversing the trend of growth in foreign investment in China in recent years.
Taiwan’s well-known restaurant brand Din Tai Fung, which has operated in the mainland for 20 years, announced the closure of its 14 stores in China by October 31 this year, dismissing about 800 employees. Similarly, IT giant IBM also recently announced the closure of its China research and development department, with over 1,000 job cuts. Automotive industry giants such as Toyota, Mitsubishi, Honda, Nissan, and Hyundai are downsizing their operations in China. The departure of these enterprises is not an isolated case but reflects a general pessimism among foreign investors in the Chinese market.
In terms of trade, international tariffs on Chinese goods are rising. Since 2000, the CCP has earned substantial profits through the international market. The international community initially hoped that economic prosperity would drive China’s democratization process, but today international society is thoroughly disappointed, and the doors of the international market are slowly closing on China.
Faced with the severe domestic consumption market and high tariffs imposed on Chinese goods internationally, Chinese enterprises’ response is to directly invest overseas and build factories.
In 2020, China’s outbound direct investment surpassed the world for the first time, reaching 1.04185 trillion yuan, or 153.71 billion US dollars, an increase of 12.3% year-on-year, and the volume of flow rated first in the world. China’s outbound direct investment accounted for over 10% of the global total for five consecutive years, reaching 20.2% in 2020. By the end of 2020, China’s outbound direct investment stock reached 25.8 trillion US dollars, ranking third globally, and its stock accounted for 6.6% of the global total. China’s outbound direct investment volume exceeds the size of attracting foreign investment.
In the first half of 2024, China’s outbound direct investment reached 85.3 billion US dollars, a 13.2% increase year-on-year; of which non-financial outbound direct investment reached 72.62 billion US dollars, a 16.6% year-on-year increase, with non-financial direct investment in Belt and Road Initiative countries at 15.46 billion US dollars.
Chinese enterprises are accelerating investment and construction overseas, meaning that employment opportunities that should have been created domestically are moving overseas, weakening the vitality of the domestic economy.
Zhejiang Province’s Ningbo City, Haishu District’s private enterprise “Junhe Pump Industry,” General Manager Zhang Junbo is busy communicating with the company’s technical staff about the construction progress of two new pump projects. In recent years, the company has established two subsidiaries in North America and Europe. Many companies like this exist.
Data from the Ho Chi Minh City Branch of the Vietnam-China Chamber of Commerce shows that as of March 2024, there are over 4,000 Chinese enterprises in Vietnam with a total registered capital of over 27.6 billion US dollars. In 2023, Chinese enterprise investments in Vietnam reached a total registered capital of 4.5 billion US dollars, nearly an 80% increase from 2022. China is the fourth largest economy investing in Vietnam (only after Singapore, South Korea, and Hong Kong, China).
Vietnamese goods exported to the U.S. enjoy basic zero-tariff treatment. For many years, the U.S. has been Vietnam’s largest export market.
In the backdrop of the U.S.-China trade war, Chinese exports to the U.S. face tariffs of over 25%, even up to 100%. Chinese companies investing in factories in Vietnam can export their goods to the U.S., the EU, ASEAN countries, and other countries with zero tariffs.
In 2023, China surpassed Japan to become the world’s largest exporter of automobiles for the first time.
According to the data released by the Mexico Statistics Bureau and the Mexico Automotive Dealers Association in January, Chinese automobile brands such as BYD, Jianghuai, and Geely sold nearly 130,000 vehicles in Mexico last year, a staggering 63% year-on-year increase, with a market share of 19.5%.
Automobiles produced in Mexico’s factories enjoy the lowest 2.5% tariff when entering the U.S. If the cars meet the strict local parts standards stipulated in the 2020 U.S.-Mexico-Canada Agreement, they may even be exempt from tariffs.
In contrast, electric vehicles manufactured in China are subject to a 27.5% tariff when imported into the U.S.
According to the Mexican government, Chinese direct investment in Mexico reached a single-year high of 587.2 million US dollars in 2022. Companies such as BYD, SAIC, MG, and Chery all plan to build factories in Mexico in 2024.
On February 23, the U.S. Manufacturing Alliance stated in a report that introducing cheap Chinese cars into the U.S. market could ultimately crush the American automobile industry. The organization believes that the U.S. should prevent Chinese companies from benefiting from the U.S.-Mexico trade agreement in which they manufacture cars and components in Mexico. The report claims that before causing mass closures of U.S. factories and unemployment, the “back door” of open trade for Chinese car imports should be closed.
According to a Reuters report in April, Mexican officials are keeping a certain distance from Chinese auto manufacturers under pressure from Washington, refusing to provide low-cost public land or tax breaks for Chinese car companies producing electric vehicles in the country.
It seems that the prospects for Chinese enterprises’ outbound investment are also uncertain. With anti-China sentiment rising in the U.S. and both parties making tariffs against China a top priority, it may be challenging to bypass the tariffs through investment and factory construction.
On August 2, the U.S. Department of Commerce stated that Washington rejected Vietnam’s request to be recognized as a “market economy.” Opponents of repositioning Vietnam’s economic system say that Hanoi’s manufacturing sector poses an increasing threat to Washington as more Chinese companies are setting up factories in Vietnam to circumvent U.S. tariffs on Chinese imports.
Chinese capital is accelerating its departure from China, hoping to integrate into the international market. However, due to vigilance against the CCP, the international community is likely to block international Chinese companies.
In terms of foreign trade, in the first half of 2024, China’s import and export data reached a historic high.
According to data from the General Administration of Customs, the total value of China’s goods trade import and export in the first half of 2024 reached 21.17 trillion yuan, a 6.1% year-on-year increase, exceeding 21 trillion yuan for the first time in history during the same period. Exports increased by 6.9%.
Although China’s export value continued to increase in the first half of the year, it faces severe challenges. The international community generally believes that China’s unrestrained dumping of goods on the international market will destroy its own industries, leading to a widespread increase in tariffs on Chinese products. For example, Chinese electric cars face tariffs of up to 37% in the EU, reflecting the international market’s distrust of Chinese products and dissatisfaction with its non-market behavior. Brussels explicitly stated that these tariffs were a response to Beijing’s long-standing unfair subsidies to electric vehicle manufacturers.
Recently, the U.S. has raised import tariffs on Chinese electric cars to 100%, virtually excluding Chinese electric cars from the market. With China gradually decoupling from the world, it is expected that Chinese enterprises will face increasingly higher export tariffs in other areas.
China’s manufacturing value-added surpassed the U.S. for the first time in 2010 and has remained in the lead since. However, with the deterioration of the CCP regime’s relations with the international community, China’s manufacturing sector’s advantages under high tariffs will gradually lose, and the comprehensive industry chain built by the Chinese over the past twenty years will face rapid collapse.
Currently, China’s real estate market, which accounts for 70% of household wealth, is still heading towards an abyss, with Goldman Sachs even stating that China’s house prices may fall by 40% by 2025. In 2020, China’s land transfer revenue reached 8.4 trillion, accounting for 55% of local fiscal revenue, but the land transfer revenue in the first half of this year was only 1.5 trillion yuan, showing a cliff-like decline. The number of foreclosed houses continues to hit new highs, with 202,000 residential foreclosed houses in the first half of this year increasing by 12% compared to the same period last year. Housing rents are continuously declining, and the vacancy rate of commercial office buildings is increasing. Although Beijing has launched a series of stimulus policies, including interest rate cuts and home purchase subsidies, the market trend remains unchangeable. What’s even more worrying is that the substantial debts owed by real estate developers may lead to bankruptcies of many financial institutions. With the decline in the real estate market, local fiscal revenue cannot be sustained, making it difficult to maintain local government personnel wages.
The Chinese people who have lost their wealth are even more reluctant to consume. The CCP government, which has always viewed the people as expendable, not only refrains from helping the people through difficulties but also seeks to further squeeze wealth from them, such as the recent “housing pension” policy aimed at continuing to drain people’s wealth to sustain its political power. Therefore, the economic outlook for domestic consumption in China is extremely grim.
Currently, China’s vast manufacturing industry hopes to find a way out through outbound investment and exports. Yet, as conflicts between the CCP regime and Western democratic countries escalate, and both U.S. parties make anti-Communism a top priority, how far will the international path of Chinese enterprises and capital go?
Here, we advise investors and entrepreneurs to avoid investing in China as much as possible.