HomeWhy businesses are pulling billions in profits from China

Why businesses are pulling billions in profits from China

  • by Annabelle Liang
  • Business reporter

image source, beautiful images

image captions,

Chinese leader Xi Jinping will meet his US counterpart Joe Biden on Wednesday

Official data shows that foreign businesses are pulling money out of China at a faster rate than they are putting it in.

The country’s slowing economy, low interest rates and a geopolitical dispute with the United States have raised doubts about its economic potential.

But businesses appear to have erred on the side of caution.

Nick Marro from the Economist Intelligence Unit (EIU) said: “Anxiety around geopolitical risks, domestic policy uncertainty and slower growth are pushing companies to decline. think about alternative markets.”

China recorded an $11.8 billion deficit in foreign investment in the three months to the end of September – the first since records began in 1998.

This shows that foreign companies are not reinvesting their profits in China but are moving money out of the country.

China needs to “correct its mistakes”

“China is currently facing slower growth and needs to make some adjustments,” said a spokesman for Swiss industrial machinery maker Oerlikon.

The spokesperson added: “In 2022, we were one of the first companies to communicate transparently that we expected an economic slowdown in China to impact our business. we”. Therefore, we started implementing actions and measures early to mitigate these impacts.”

China is still the company’s key market. It has nearly 2,000 employees across the country, accounting for more than a third of its sales.

Oerlikon noted that China’s economy is still expected to grow at around 5% over the next few years, “one of the highest in the world.”

Since the pandemic began, businesses like Oerlikon have faced challenges operating in the world’s largest market.

China has implemented one of the world’s strictest pandemic lockdowns through a “zero Covid” policy.

This causes disruptions to the supply chains of many companies, such as tech giant Apple, which manufactures the majority of iPhones in China. Since then, the company has diversified its supply chain by moving some manufacturing to India.

image source, beautiful images

image captions,

Apple has moved some iPhone production out of China

“We don’t see many companies withdrawing from China. Many large multinational companies have been in the market for decades and they are not willing to give up the market share they have spent 20, 30 or 40 years cultivating. But especially on the new investment side, we are seeing a reassessment.”

Low interest rates

Businesses are also considering the impact of interest rates. China went against this trend when many countries around the world raised interest rates sharply last year.

Many major central banks, including the US Federal Reserve and the European Central Bank, have raised interest rates to address inflation. Higher borrowing costs promise higher returns that also attract foreign capital.

Meanwhile, policymakers in China have cut borrowing costs to support the struggling economy and real estate industry. The yuan has lost more than 5% of its value against the dollar and euro this year.

The European Union Chamber of Commerce in China said that instead of reinvesting income from China into the country, businesses are spending money.

It added: “People with excess cash and income in China are increasingly moving these funds abroad, where they will earn a higher return on their investment than investing in China. “

Some companies have pulled income from China as “part of a long-term cycle” of making profits “once their projects hit the mark,” said Michael Hart, president of the American Chamber of Commerce in China. to specific scale and profits”.

“The withdrawal of profits does not necessarily indicate that companies are unhappy with China, but rather that their investments here have matured.”

Mr Hart said this was “encouraging because it means companies can integrate their China operations into their global operations”.

Canada-based aerospace electronics company Firan Technology Group has invested up to C$10m (US$7.2m; £5.9m) in China over the past decade and has withdrew C$2.2 million from the country last year and in the first quarter of 2023.

“We are absolutely not leaving China,” said company president and CEO Brad Bourne. We are investing and growing our business there and taking out any excess cash to invest elsewhere in the world.”

image source, beautiful images

image captions,

China is restricting exports of germanium, a substance needed to produce chips

He added: “We have excess cash in China and bringing that back to fund our recent US acquisitions is just prudent cash management and that which means our loan has decreased.”

Uncertainty ahead

Analysts say there is much uncertainty about what lies ahead – both in terms of interest rates and the China-US relationship.

Dan Wang, chief economist at Hang Seng Bank China, said China’s central bank may continue to lower interest rates this year to support the economy.

Lowering interest rates could put more pressure on the already weak yuan. “Currently, the room for monetary easing is very limited because of the pressure of currency devaluation,” she said.

“If economic sentiment improves next month, it is safe to say China will lower interest rates. But if sentiment does not improve, the central bank will have to make a very difficult decision.”

The EIU’s Mr. Marro said businesses are cautiously optimistic about the upcoming meeting between President Xi and Biden.

“Face-to-face meetings between the two presidents tend to provide a stabilizing force to bilateral relations. We have also seen a series of US-China diplomatic engagements over the past few months, which contributed part of creating the feeling that both sides are moving toward reaching an agreement.” downstairs the relationship,” he said.

“That said, it won’t take long for things to fall apart again. Until companies and investors feel they can navigate with more certainty, the drag on foreign investment in China will continue.”


latest articles

explore more