Why companies are taking billions of dollars in earnings out of China

Why companies are taking billions of dollars in earnings out of China

According to official statistics, foreign corporations have been withdrawing money from China more quickly than they have been putting it in.

Doubts about the nation's economic potential have been raised by the weakening economy, low interest rates, and a geopolitical conflict with the US.

This week, US President Joe Biden and Chinese Leader Xi Jinping will have a pivotal encounter that will be closely watched.

However, it seems that companies are already erring on the side of caution.

According to Nick Marro of the Economist Intelligence Unit (EIU), "companies are thinking about alternative markets due to anxieties around geopolitical risk, uncertainty around domestic policy, and slower growth."

For the first time since records started in 1998, China posted a $11.8 billion (£9.6 billion) deficit in foreign investment in the three months ending at the end of September.

This implies that international businesses are transferring their revenues out of China rather than reinvested in the nation.

China must "correct" itself.

According to a representative for Oerlikon, a Swiss maker of industrial equipment, China has to make some adjustments and is presently suffering slower development. Oerlikon withdrew 250 million francs ($277 million; £227 million) from China in the previous year.

"In 2022, we were a member of the first companies to transparently communicate regarding how we expect the downturn in economic activity in China to impact our business," the representative continues. "Consequently, we began early to implement actions and steps to mitigate these effects."

China is still one of the company's primary markets. Over 2,000 people work for the company nationwide, making up over one-third of its total revenue.

According to Oerlikon, growth in the Chinese economy is still predicted to be around 5% over the next few years, "which is among the highest in the world."

Businesses such as Oerlikon have had difficulties in functioning in the largest market in the world ever since the epidemic began.

With its "zero-Covid" policy, China has imposed one of the tightest pandemic lockdowns in the world.

Numerous businesses' supply lines were affected, including the massive tech company Apple, which produces the majority of its iPhones in China. After thereafter, the company moved part of its manufacturing to India in order to diversify its supply chain.

According to Mr. Marro, as tensions between China and the US increased this year due to new export limits on raw materials and technology required to produce sophisticated chips, more businesses have heeded demands for diversification.

"There aren't many businesses leaving China at the moment. Having been in the market for decades, many large multinational corporations are unwilling to give up market share that they have worked hard to earn over the course of 20, 30, or 40 years. However, we are seeing a reevaluation, namely with regard to fresh investment."

low rates of interest

Businesses are also thinking about how interest rates will affect them. China defied the global trend last year, with several other nations raising rates significantly.

In an effort to combat inflation, a number of significant central banks, such as the European Central Bank and the US Federal Reserve, have raised interest rates. Foreign money is drawn in by the greater cost of borrowing, which offers larger returns.

China's leaders have lowered borrowing costs in the meantime to boost the country's faltering real estate sector and economy. This year, the value of the yuan has dropped by more than 5% compared to the dollar and the euro.

The European Union Chamber of Commerce in China claims that companies are squandering their revenues rather than reinvested them in China.

It continues: "Those with more money and earnings in China have been increasingly transferring these funds overseas, which will earn a higher investment back compared to investments in China."

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Michael Hart, president of the American Chamber of Commerce in China, said that several companies have withheld revenues from China as "part of their long-term cycles" of extracting profits "once their projects reach a specific scale and profitability".

"The withdrawal of profits is not always a sign of that companies are disappointed with China, but rather that their expenditures here have matured."

Mr. Hart describes it as "encouraging because it means companies are able to integrate their China operations into their global operations."

Firan Technology Group, a Canadian aerospace electronics business, has spent up to C$10 million ($7.2 million; £5.9 million) in China over the last ten years. However, it has withdrew C$2.2 million from the nation this year and in the first quarter of 2023.

"We're not really leaving China. President and CEO of the company Brad Bourne said, "We are investing there, growing our business, while obtaining out any excess cash to invest everywhere in the world."

We simply exercised smart cash management by returning the excess cash we had in China to support our recent US acquisitions, which resulted in a reduction in our borrowing," he continues.

Ahead, uncertainty

about interest rates and US-China relations in particular, analysts claim that there is a great deal of uncertainty about the future.

Dan Wang, the chief economist of Hang Seng Bank China, believes that in order to bolster the country's economy, the central bank of China may cut interest rates even more this year.

Reducing interest rates may increase the pressure on the yuan, which is already weakening. "There is very limited room for quantitative easing right now because of the pressure with currency depreciation," she claims.

It's reasonable to predict that China will cut interest rates if economic conditions improve the following month. However, the central bank would have a very tough choice if opinion doesn't change."

According to Mr. Marro of the EIU, businesses are cautiously hopeful about the planned meeting between Presidents Xi and Biden.

"In-person encounters between the two presidents have the tendency to stabilize bilateral relations. of recent months, there has also been a surge of diplomatic activity between the US and China, which he argues has added credence to the idea that both parties want to establish a foundation for their relationship.

"Having said that, it doesn't take much for things to break down once again. This will keep foreign investment in China from increasing until businesses and investors feel more confident in navigating the situation."