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2023 Saw China’s First Net Capital Outflow in Five Years

Amid a slowing economy in 2023, China saw a net outflow of funds from transactions with foreign countries for the first time in five years. Net outflows totaled 68.7 billion yuan. The outflows were driven by shrinking investments by foreign businesses into China as well as by affluent Chinese households’ increased travel and investment overseas.

China saw a net direct investment outflow of 118.5 billion yuan in 2023, the highest figure since 2010. It is unclear whether a bigger portion of this investment outflow resulted from transfers by Chinese firms or by foreign firms operating in China. On the one hand, Chinese companies’ expansion abroad has led to outflows; on the other hand, foreign companies’ downsizing and capital withdrawal from China has certainly contributed. A late-2023 survey of Japanese companies operating in China found that nearly 50% of respondents either reduced or did not expand 2023 investments in China compared with 2022. The number of foreign manufacturing and foreign industrial companies in China fell in November 2023 to its lowest level since November of 2004, dropping 0.4 percent compared with the same period in 2022.

China’s stock market hit new lows in late January 2024, down nearly 20% from the 2023 market highs. Meanwhile, feverish trading in foreign exchange-traded funds (ETFs) linked to the Nikkei and U.S. indices has led to a temporary suspension of those ETFs’ trading within China.

Following the end of Beijing’s zero-COVID policy in January 2023, affluent Chinese households increased their investment and travel overseas. This contributed to 2023’s capital outflows. The trend of capital flight from China persists in 2024.

China’s ability to attract foreign capital has weakened as the economy has slowed. The government faces challenges in restoring confidence and financial inflows. Ebbing confidence in China’s economic progress is reflected in the country’s investment outflows, foreign corporate downsizing, Chinese travel and investment abroad, and ongoing capital flight.

Source: Nikkei, January 25, 2024