U.S. and European companies are diverting their investments away from China toward other emerging markets. India is the primary recipient of this redirected foreign capital, followed by Mexico, Vietnam, and Malaysia. This shift is occurring despite China’s growing share of global growth, underscoring the significant concerns that foreign investors harbor regarding China’s business environment, economic recovery, and political landscape.
According to Tenpao Lee, an economics professor at Niagara University in New York, despite recognizing China as a threat, the United States cannot abruptly sever ties with its communist counterpart. This caution is rooted in the potential impact such a move would have on inflation and the global economy.
The report indicates a remarkable surge in the value of declared greenfield investments from the United States and Europe into India, experiencing a substantial increase of approximately $65 billion or a staggering 400% between 2021 and 2022. In contrast, investments in China witnessed a significant decline, plummeting to under $20 billion in the previous year from its peak of $120 billion in 2018.
Before the pandemic, an estimated $150 billion annually exited China through outbound tourists, as per Natixis, a banking institution. Despite international travel not fully recovering to pre-pandemic levels, economists assert that elevated U.S. interest rates and a depreciated yuan remain compelling factors for affluent Chinese individuals to transfer their funds abroad.
In the initial half of 2023, China’s balance of payments data revealed a deficit of $19.5 billion, serving as an indicator of potential capital flight, though the actual amount of funds unofficially leaving the economy might exceed this reported figure.
The research organization noted that a process of diversification is actively underway, reflecting a strategic shift in investment patterns. However, the report also highlighted a reality check, acknowledging that achieving the objectives of the ‘de-risking’ policies adopted by advanced economies will be a gradual process. This gradual transition is attributed to the central role China plays in global supply chains, emphasizing that it will take years for these economies to realize the goals outlined in their diversification strategies fully.
