There are many reasons for this outflow. One is perhaps the regulatory tightening on technology firms that China initiated in 2020. This tightening has led to concerns about the potential for staff detentions on allegations of financial misconduct which has prompting some businesses to scale back their operations. The sluggish COVID-19 recovery and a decline in consumer and business confidence have also contributed to negative FDI flows.
It is the first significant annual drop since a 7.7% decline in 2016. This reduction suggests weakened global demand for Chinese products, likely due to the negative impact of ongoing trade tensions with the United States and the de-risking strategies (see above) being implemented by many Western nations today.
When Beijing cut back on lending to property developers in 2020 and 2021 in attempts to deflate their property bubble, the real estate sector, which accounts for a significant portion of China’s GDP, began experiencing downturns with sales volumes dropping by 15% in 2023 and numerous developers facing liquidity issues.
Since consumer confidence is directly correlated with retail consumption, this slowdown suggests that Chinese consumers are becoming more cautious about their spending amidst economic uncertainties.
Chinese products exported to the rest of the world might come with discounts, ultimately helping lower the overall inflation rate if these discounts are passed on to international consumers. That said, low consumption will likely lead to higher unemployment in mainland China.
This rising trend in joblessness among city-dwelling young Chinese has been ongoing for months, in part attributable to a disparity between the skills acquired by new graduates and the nature of available employment opportunities.
Homebuyers are hesitant to commit to mortgages amid the uncertainty surrounding income prospects and property values, while banks are increasingly cautious about extending credit to developers, many of whom have defaulted.
These cumulative economic pressures have ultimately manifested in the feeble performance of the Chinese stock market. In the year 2024 alone, market valuations on the Chinese and Hong Kong exchanges have seen over $1 trillion erased.
According to the National Bureau of Statistics of China, the GDP growth rate fell to an estimated 5.2% in 2023.