FDI to recover on stabilizing trend of Q4

China's real economy and securities markets attracted positive net inflows of foreign investment last year despite the pressures posed by overseas central banks' interest rate hikes, underscoring the resilience of the Chinese economy, experts said on Monday.

Looking at 2024, foreign capital inflows into China are poised to further stabilize and recover as external pressures fade, they said. They, however, hastened to caution that policy efforts to consolidate domestic economic recovery remain critical to stabilizing foreign investors' confidence in renminbi-denominated assets.

The State Administration of Foreign Exchange said on Sunday that a net total of $62.1 billion in equity-based foreign direct investment flowed into China last year, with a noticeable surge in the fourth quarter compared to the previous one.

China also attracted net foreign inflow of securities investment in 2024. In the fourth quarter, the size of net inflows reached the highest level in almost two years, SAFE's preliminary estimates showed, albeit without giving the specific numbers.

"These data indicate that more foreign investors are investing in China, developing their business here and allocating renminbi-denominated assets," said Wang Chunying, deputy head of SAFE.

Earlier data from the Shanghai Head Office of the People's Bank of China, the country's central bank, also showed that overseas institutions' holdings in China's interbank bond market rose by about 280 billion yuan ($38.9 billion) year-on-year to 3.67 trillion yuan as of December.

The inflows took place despite the US Federal Reserve imposing its most aggressive interest rate hikes in decades, which sharply widened the US-China interest rate spread and put pressure on the renminbi.

Liu Chunsheng, an associate professor at the Central University of Finance and Economics, said China was able to sustain FDI and securities investment inflows last year despite a harsher international environment.

This, he said, showed the Chinese economy is resilient. "China's vast domestic market remains an investment destination that foreign enterprises can't afford to overlook."

Wang Youxin, a senior researcher at Bank of China, said China's FDI inflows started to improve in the fourth quarter as the pressure of global industrial chain adjustments eased while prospects of returns on investment in China improved amid a steadier economic recovery.

Capital inflows into Chinese onshore bonds also picked up in the fourth quarter, Wang said, as the US Fed stopped interest rate hikes in September, sparking expectations of US rate cuts in 2024, which caused the renminbi to rebound, he said.

SAFE data showed that foreign holdings of Chinese onshore bonds rose every month from September to December, leading to a net increase of more than $60 billion in holdings during the period.

The trend of improving cross-border capital inflows may continue in 2024, Wang said, backed by the narrowing US-China interest rate difference, the continuous recovery of the Chinese economy and the ongoing policy efforts to facilitate a revival of China's A-share market.

Nevertheless, China recorded a deficit in FDI of $152.5 billion in 2023 — which means Chinese enterprises' overseas investments outnumbered foreign companies' investments in China — versus a surplus of $32.3 billion in 2022, according to SAFE.

With China feeling some pressure of capital outflows, the government's commitment to enhancing the business environment is vital for boosting the confidence of foreign investors, said Pan Yuanyuan, an associate researcher at the Chinese Academy of Social Sciences' Institute of World Economics and Politics.

"Domestic economic fundamentals and capital market investor sentiment remain the most critical factors determining cross-border capital flows. Policy efforts should be deepened to ensure a sustained economic recovery and bolster investor confidence," said Wang at Bank of China.

SAFE data also showed that China's current account surplus amounted to $264.2 billion in 2023, continuing to be within a reasonable range and equivalent to 1.5 percent of the country's GDP. In 2022, the ratio was 2.3 percent.