China’s stock exchanges have stopped releasing daily data on overseas fund flows. China may see its first yearly outflow from equities in 2024 — but if and when it happens, investors won’t know from exchange data, Bloomberg reported. The change, first hinted at in April, comes as foreign funds have steadily withdrawn from the market, taking the year-to-date tally to negative as of August 19. Analysts saw the move as another effort by authorities to prop up the market, hoping to reduce volatility induced by high-frequency data and turn investor focus to longer-term indicators. If the selling persists, China may see the first annual outflow from its stock market since 2016, when Bloomberg began tracking purchases through the trading links with Hong Kong.
Private equity deals are drying up as China sinks deeper into geopolitical problems with Western countries hardening their stance against China on trade and Taiwan.
Top private equity firms shy away from China
Most of the world’s biggest private equity firms, including Blackstone, KKR and Carlyle, have put the brakes on deals in China this year as geopolitical tensions rise and Beijing exerts tighter control over business, Financial Times has reported recently. Dealmaking in the world’s second-largest economy has slowed significantly, with just five new investments — mostly small — by the 10 largest global buyout firms this year.
Private equity firms that amassed more than $1.5 trillion of assets in China in just two decades are now struggling to offload once-promising investments they were counting on for hefty returns, Bloomberg had reported in November last year. Mounting concerns about the risks of investing in mainland China left so-called secondary buyers demanding discounts of 30% to more than 60%. Haircuts in Europe and the US are closer to 15%. The lack of easy exits – affecting the likes of Blackstone-backed PAG and Carlyle Group Inc. – has shifted the world’s second-largest economy from a vast frontier for buyouts into an uncertain landscape for long-term investing, Bloomberg wrote.
Citing figures from Dealogic, the FT report said the same 10 top private equity firms collectively made 30 investments in the country as recently as 2021 and similar numbers in earlier years, but the numbers have fallen every year since then. This year, seven of the 10 have made no new investments at all. Though private equity deals have reduced across the world due to high interest rate, but the number of deals struck by the 10 firms has fallen more sharply in China than globally in recent years.“China has been a roller coaster for investors, with geopolitical tensions, regulatory unpredictability and economic headwinds,” Kher Sheng Lee, Asia-Pacific co-head for the Alternative Investment Management Association, told FT. While the country’s rapid growth had fuelled a “gold rush” in the past, “today, it’s more like panning for gold with a magnifying glass and tweezers”, he said.“Geopolitical constraints such as outbound investment rules make China increasingly look radioactive as an investment market despite its opportunities,” said Han Lin, China country director at consultancy The Asia Group.
FDI in China hits a deep low
Foreign businesses’ direct investment into China last year increased by the lowest amount since the early 1990s, underscoring challenges for the nation as Beijing seeks more overseas investment to help its economy.China’s direct investment liabilities in its balance of payments rose by $33 billion last year, 82% down on 2022, according to data from the State Administration of Foreign Exchange released Sunday. That measure of new foreign investment into the country — which records monetary flows connected to foreign-owned entities in China — slumped to the lowest level since 1993.
The investment fell in the third quarter of 2023 for the first time since 1998. Although it recovered a little and returned to growth in the final quarter, the $17.5 billion in new money in that period was still a third lower than the same period of 2022.
There’s rising attractiveness to multinationals of keeping cash overseas rather than in China, because advanced economies have been raising interest rates, while Beijing has been cutting them to stimulate the economy. A recent survey of Japanese firms in China showed most of those companies cut investment or kept it flat last year, and a majority don’t have a positive outlook for 2024.
However, direct investment into China by German companies reached a record of nearly €12 billion ($13 billion) last year, according to a German Economic Institute report based on data from the Bundesbank. Investment in China as a share of Germany’s total direct investment abroad expanded to 10.3% last year — the highest since 2014, the report showed.
EU firms losing confidence in China
Business Confidence Survey 2024 by European Union Chamber of Commerce in China, released in May, showed that despite the re-opening of China’s borders in early 2023, business confidence in the market continued on a downward trend.
Instead of benefitting from the strong economic rebound that many had expected, European firms operating in China found themselves facing more uncertainty. China’s structural issues—including sluggish demand, growing overcapacity and the continued challenges in the real estate sector—along with market access and regulatory barriers, continued to negatively impact European companies.
A positive finding in the survey was the notable increase in the proportion of respondents reporting market opening in their industry (45%, +9pp y-o-y). However, 68% reported that business became more difficult, the highest percentage on record. In addition, 55% of respondents ranked China’s economic slowdown as a top-3 business challenge, a 19-percentage point increase year-on-year (y-o-y); 58% missed business opportunities as a result of market access or regulatory barriers; 44% are pessimistic about profitability over the next two years, the highest level on record; and the proportion of respondents positive about their growth prospects dropped a staggering 23 percentage points y-o-y.
An opportunity for India?
Though the dip in foreign capital inflows into China was to a great degree due to global factors, the sentiment in Western countries turning against China due to geopolitical issues is also a big factor in play. This can be an opportunity for India to attract foreign investors which have turned shy of China.
India has already become an alternative investment destination for many western companies as “less and less” foreign investment is going into China, Hamid Rashid, an expert at the UN, said in May as the global body revised upwards the Indian GDP growth for 2024.
India aims to attract at least $100 billion a year in gross foreign direct investment, as per a top official, as it courts investors looking to diversify away from China. “Our target is that we will average at least $100 billion over the next five years. The trend is very positive and upward,” Rajesh Kumar Singh, secretary in the Department for Promotion of Industry and Internal Trade, told Bloomberg in April.
The ambitious target compares with an annual average of more than $70 billion in FDI in the five years through March 2023 and would be a reversal in trend after last year’s decline. Singh said that the figure for the current fiscal year will be “closer to” the $100 billion target.
Strategic reforms are needed to enhance India’s appeal to global investors as despite having huge potential, FDI data shows that the country has not fully capitalised on its opportunities, think tank GTRI has said recently. Suggesting a four-step plan, the GTRI said that measures which can help India position itself as a leading choice for foreign investors include reducing cost disadvantages for companies relocating to India, improving the Ease of Doing Business throughout the business lifecycle, and establishing a framework for evaluating investment proposals.
(With inputs from agencies)
