HONG KONG (Reuters Breakingviews) - Trade with China gets the attention these days, but shrinking business investments into and out of the country present a longer-term concern. Inbound funds from overseas grew less than 1 percent in yuan terms last year, to $131 billion. Flows to North America and Europe tanked. Weaker demand is a problem, but deepening suspicions are as much to blame.
President Donald Trump’s obsession over the U.S. trade deficit with China, which widened by 17 percent to $323 billion in 2018, has put it front and center of the policy debate. Other data from December also was surprisingly grim. Chinese exports to anywhere in the world fell more than 4 percent, while imports dropped nearly 8 percent. Both suggest a worrying softness in consumption, especially on the mainland.
FDI flows look even worse. Beyond the official Chinese data released on Tuesday, much “foreign” direct investment comes from Chinese-owned companies overseas buying onshore assets. That means the real figure is almost certainly negative. Separately, multinational law firm Baker & McKenzie found that Chinese deal volume into North American and European business interests fell by 40 percent last year after stripping out ChemChina’s $43 billion takeover of Syngenta.
Trade has always been a vital driver of FDI. Western companies initially poured into the People’s Republic to find cheaper production for their home markets. Because the country’s private sector struggled to secure credit from state banks, foreign capital was welcomed. Investment from abroad offered a way for mainland companies to move up the value chain more quickly, lower logistics costs and widen margins. Suppliers bought offshore distributors; generic manufacturers acquired brands; white-goods manufacturers built factories abroad.
Mutual distrust and policy barriers are fraying the relationship. Elon Musk’s decision to build a giant Tesla factory on the outskirts of Shanghai stands out as one of the few big greenfield China bets from 2018. Most transactions captured by research outfit Dealogic were relatively conservative: private equity investments or consolidations of partnerships.
There are political implications. Unlike simply buying goods, cross-border business investment builds deep links between companies, economies and governments. Such integration also helps smooth relationships. In addition to being bad for competition and efficiency, cooling FDI weakens the pro-engagement factions on both sides.
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