West’s de-risking starts to bite China’s prospects of recovery

Foreign investors have been sour on China for most of this year, but data released over the past month has provided clear evidence of the negative impact de-risking strategies are having on the world’s second-largest economy. — Reuters

BEIJING: US furniture company head Jordan England thinks his firm’s Chinese suppliers are among the best in the game, but geopolitics and a slowing economy have pushed him to source more products from South-East Asia, Eastern Europe and Mexico.

“I’m looking to move away from China,” said England, chief executive officer of Florida-based Industry West.

“It was always ‘China plus one’,” he said, referring to the diversification strategy many businesses began implementing after Washington imposed trade tariffs on Beijing in 2018 to ensure they were not wholly dependent on Chinese suppliers.

“Now it’s like ‘plus-10’ and then China,” he added, with the latter down to providing half of Industry West’s products and being trimmed more.

Foreign investors have been sour on China for most of this year, but data released over the past month has provided clear evidence of the negative impact de-risking strategies are having on the world’s second-largest economy.

Activity surveys showed manufacturing unexpectedly contracted in October, while exports accelerated their decline.

China recorded its first-ever quarterly deficit in foreign direct investment in July to September, suggesting capital outflow pressure.

Nicholas Lardy, senior researcher at the Peterson Institute for International Economics, said in a note the new data imply that foreign firms are not only declining to reinvest earnings, but are selling existing investments and repatriating funds.

This trend could further weaken the yuan and clip China’s economic growth potential, he added.

“In recent years, the scale, proportion and growth rate of foreign investment absorbed by China have all remained at a high level,” He Yadong, a Chinese commerce ministry spokesperson, said.

Businesses have longstanding worries about geopolitics, tightening regulations and a more favourable playing field for state-owned companies.

But for the first time in the four decades since China opened up to foreign investments, executives are now also concerned about long-term growth prospects.

A survey released last week by the Conference Board, a think tank, showed more than two-thirds of the CEOs who responded said China’s demand has not returned to pre-Covid levels.

Another 40% expect a decrease in capital investments in the country over the next six months and a similar proportion expecting to cut jobs. China is outwardly confident about growth despite a global economic slowdown.

Policy advisers favouring a target of about a 5% expansion of gross domestic product in 2024 see the country aiming to double the economy’s size by 2035.

But England said he is concerned about how his Chinese suppliers that also produce for the domestic market will cope with the country’s severe property market downturn.

“I’m worried about these factories going from 500 workers to 200, to 100,” he said.

Premier Li Qiang’s overtures declaring China open for business to foreign investors after the pandemic have been greeted with scepticism in some Western boardrooms in light of a broader anti-espionage law, raids on consultancies and due diligence firms and exit bans, trade bodies said.

Li was expected to make a similar call yesterday at the country’s inaugural China International Supply Chain Expo, used to tout its supply chain advantages.

European firms have raised fair competition concerns about state-directed lending to Chinese manufacturers.

Noah Fraser, managing director of the Canada China Business Council, said “bad blood” remains over the detention of two Canadians from 2018 to 2021.

In private equity, while Asia-focused funds have allocated capital to China, data from Preqin shows that as of Nov 24, no China-focused buyout fund had been raised in 2023 in any currency, compared with US$210mil in 2022 and US$13.2bil in 2019, before the pandemic.

Primavera Capital founder Fred Hu cited mounting macroeconomic uncertainty, a “murky capital market outlook” and lingering concerns over past regulatory crackdowns on high-growth industries such as technology and education. — Reuters

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