China sees investment chill
The People’s Republic of China is far from rich, with average per capita disposable income officially at US$3,300 in 2014 – less than a tenth of the US$38,000 in the United States.
There should be, as increasingly defensive China bulls point out, plenty of investment opportunities available to unlock wealth. It is therefore a bad sign if investment interest falls – as it did last year.
In the second half of 2014, the mainland claimed a combined goods and services trade surplus of approximately US$120 billion. Yet foreign exchange reserves dropped US$150 billion.
Some balance of payments components see volatile movements and outflows can become inflows in short order. Unfortunately, the problem includes more durable spending.
China reported that inbound foreign direct investment (FDI) was basically flat at US$120 billion in 2014. This masks underlying weakness.
According to the National Bureau of Statistics, real estate investment soared 20 per cent versus 2013, past US$34 billion. Chinese real estate is hardly thriving and this money is unlikely to be genuine investment. Rather, it is money parked in Chinese real estate awaiting better opportunities somewhere.
Excluding real estate, inward FDI fell 4 per cent from a year ago. In particular, manufacturing investment fell more than 12 per cent to about US$40 billion.
A starker view is provided by the investment source. China gets its large FDI numbers by treating Hong Kong as a foreign investor. This is both odd politically and questionable economically, as it is hard to see how money from Hong Kong still brings the innovation FDI is useful for.
If a country with disposable income of US$3,300 sees durable capital outflow, it faces a dim future
Hong Kong by itself supposedly accounted for over two-thirds of investment into China in 2014. Some of this is genuinely foreign and routed through Hong Kong, much of it is not. Reported investment from Hong Kong rose more than 10 per cent, past US$81 billion.
The next-largest source was the British Virgin Islands at a mere US$6.2 billion. Investment directly from the United States was US$2.4 billion. Excluding Hong Kong, 2014 FDI fell 13 per cent on the previous year to only US$38.3 billion.
While the drop in true inward investment will have long-term effects, it is still just one year. Better times could lie ahead. It is strange, then, that Beijing seems intent on discouraging multinationals in the long term.
In 2013, the first year of Xi Jinping’s term as Communist Party General Secretary, we saw foreign companies attacked for their pricing practices. This morphed into attempted extortion of technology, culminating in recent security rules that essentially require technology transfer for full market access.
From the foreign standpoint, firms doing business in the mainland proceed at their own risk. The US government interest is to ensure no dual-use technology is coerced. From Beijing’s standpoint, this is another self-inflicted wound, which will inhibit prosperity.
Beijing denies a mass withdrawal of foreign investment, and correctly so. As is generally the case for China, the threat is not collapse but stagnation. If a country with disposable income of US$3,300 sees durable capital outflow, it faces a dim future.
Derek Scissors is a resident scholar at the American Enterprise Institute
