Significant purchase of Chinese bonds in November debunks ‘foreign capital flight’ hype
Published: Dec 21, 2023 04:44 PM
Illustration: Chen Xia/Global Times

Illustration: Chen Xia/Global Times

Foreign investors made an unexpected net investment of $35 billion into China's domestic bond market in November, marking the largest monthly inflow since records began six years ago, The Wall Street Journal (WSJ) reported on Tuesday. The significant influx of funds could indicate a positive outlook on China's economy, according to the report.

Foreign investors' increasing interest in Chinese domestic bonds, which comes shortly after Moody's downgrading outlook on China's debt rating, debunks the theory of "foreign capital withdrawal," serving as a strong testament for China's economic resilience in the face of global economic challenges.

As China celebrates the 45th anniversary of its reform and opening-up, a number of foreign media outlets have raised doubts about China's ability to attract foreign investment, a major symbol of China's achievements in the 45 years of reform and opening-up. However, the current trend of foreign investors favoring Chinese domestic bonds effectively refutes the claim that "foreign capital has lost confidence in the Chinese economy and is fleeing."

Such hypes often cite a 9.4 percent year-on-year decline in actual foreign direct investment (FDI) in China in the first 10 months of the year, suggesting "capital fleeing China." However, despite the decline in the actual utilization of foreign capital, the scale of FDI in China continues to remain high. Notably, the number of newly established foreign companies has continued to grow. A total of 48,078 new foreign-invested companies were established in China during the first 11 months of 2023, marking a year-on-year growth of 36.2 percent, official data showed. 

It is also important to note that the fluctuation in actual utilization of foreign capital is a normal occurrence influenced by factors such as the US' aggressive monetary policy. It does not reflect the overall trend of foreign investment in China.

From March 2022 to September 2023, the US Federal Reserve (Fed) implemented 11 consecutive interest rate hikes, resulting in a cumulative increase of 525 basis points. This aggressive approach marks the most significant rate hike in nearly three decades in the US, aimed at curbing surging inflation. As a result, interest rates have surged from near zero to 5.25 percent - 5.5 percent, reaching the highest level in 22 years. 

It is inevitable that foreign investors will be impacted by these elevated interest rates, leading to potential fluctuations in their new investments in China. However, it is important to note that some foreign media outlets, driven by ulterior motives, tend to hype up a "massive withdrawal of foreign capital from China" whenever there is any fluctuation.

When considering the long-term perspective, China's ability to attract foreign investment remains strong. The stark shift in investment trend reported by WSJ aligns with the Fed's nearing end of its interest rate hike cycle. This occurrence is not mere coincidence. It is believed that many investors perceive the conclusion of the Fed's rate hike actions, leading them to adjust investment plans.

Furthermore, it is important to highlight the report by WSJ indicating a surge in foreign investors' participation in China's domestic bond market. This counters the negative hype surrounding China's debt sustainability. 

Despite Moody's recent downgraded outlook on China's debt rating, it is important to recognize that China holds the largest size of foreign exchange reserves globally. This significant reserve gives China the necessary capacity to meet its debt obligations.

A closer look into China's foreign investment data in the first three quarters shows that developed countries have not reduced their investment in China. In the first three quarters, the actual investment from France, the UK, and Canada in China has more than doubled compared to the same period last year, according to media reports.

More importantly, foreign investment in China's high-tech sector continues to steadily increase. In the first three quarters, China's high-tech manufacturing industry saw a year-on-year increase of 12.8 percent in actual foreign investment utilization, according to media reports.

Investment is a dynamic and ever-changing aspect of the market, and it is not uncommon for some foreign companies to adjust their investment plans due to various reasons such as fierce market competition, rising costs, the need to establish factories in other countries for supply chain reasons and geopolitical uncertainty. However, China's robust and resilient economy, coupled with its vast consumer market, will continue to attract foreign investment. 

The claim of "massive withdrawal of foreign companies from China" does not reflect the reality. As China keeps making efforts to improve its business environment, expand opening-up, and promote innovation, this baseless and ill-intentioned hype will inevitably be proven false and fade away over time.

The author is a reporter with the Global Times.