More Money Is Leaving China

China’s already beleaguered economy is facing yet another problem. Foreign firms, some long-established in China, are rethinking plans to modernize and expand and have begun to send their profits home or elsewhere in Asia and even further afield. The trend has diverse causes — some immediate, some more fundamental – and has been developing for some time. Whatever its cause, however, it has made China’s economic recovery looks even more problematic.

The outflow has gained momentum for more than a year now. According to Beijing’s National Bureau of Statistics, foreign companies pulled a total of $160 billion of earnings out of country during the 18 months through September, the most recent month for which data are available. In just the summer quarter alone, withdrawals overwhelmed foreign investment inflows so that for the first time in a very long time, China suffered a net outflow of foreign-based funds, to the tune of $11.8 billion. There can be little doubt that these significant funds flows have contributed to the about 5% decline China’s yuan has suffered relative to the U.S. dollar so far this year.

To be sure, some of this movement reflects temporary factors. While the People’s Bank of China (PBOC) has cut interest rates in an effort to encourage consumer spending and capital investment, the Federal Reserve (Fed) in the United States and the European Central Bank (ECB) have raised interest rates as part of their anti-inflationary policies. The Bank of England and the Bank of Canada, as well as the Federal Reserve in Australia have also raised rates. Managers, to get the best return on retained earnings before deploying them on a more permanent basis, have naturally sent the funds to places where they can get the highest rates.

If this were all, recent outflows would be easy to dismiss as something that will reverse as financial conditions change, and they inevitably will. But more fundamental and lasting influences are also influencing funds flows. China’s weakening economy has factored into the equation. According to Beijing’s statistics bureau, exports, still critical to Chinese growth, have declined, while industrial activity has slowed and recently hinted at an outright decline. Failures among property developers, such as Evergrande and Country Garden, have stolen from the economy the positive effects of residential construction that for years had spurred economic growth. It is also discouraging to foreign business managers that recent steps taken by Beijing to get the economy back on an acceptable growth path have failed to get the desired result. Few are talking yet about an outright economic contraction, but the situation nonetheless impels business managers to deploy their earnings – even that part emanating from Chinese operations – elsewhere.

Possibly even more troubling for foreign firms in China are the increasingly strained trade and diplomatic relations between China and the west. Washington has blocked the sale of certain technologies to China and also forbidden Americans from investing in Chinese technological ventures. Beijing has responded by blocking the export of vital materials to the west and Japan. Such less than friendly policies, even if far short of open conflict, raise uncertainties and risks and make China a less attractive place for foreigners to do business.

Adding to businesses’ concerns is Beijing’s increased belligerence toward Taiwan and its stepped-up surveillance of foreign firms operating in China. In just the last few months, Chinese authorities have raided two American firms operating in Shanghai, Bain & Co. and Mintz. These authorities detained several Mintz employees and fined the firm. On top of all else that is happening in China and with China trade, these implicit threats offer much reason for Americans, Europeans, and Japanese to consider getting out while the getting is good. The situation certainly argues forcefully against any steps to enlarge their presence in the country.

These earnings trends add to the hurdles facing Xi Jinping’s efforts to re-establish China’s once impressive growth trend. Along with all else weighing on the Chinese economy, such a trick, if Beijing can pull it off at all will be a long time in coming.