Why are companies extracting billions of dollars in profits from China?

Official data shows foreign companies are withdrawing money from China faster than they are putting it in.

The country's economic slowdown, low interest rates and geopolitical conflict with the United States have raised questions about the country's economic potential.

But it appears that companies are already erring on the side of caution.

“Anxiety around geopolitical risks, domestic policy uncertainty and slowing growth are prompting companies to consider alternative markets,” said Nick Marlo of the Economist Intelligence Unit (EIU).

China recorded an $11.8 billion (£9.6 billion) deficit in overseas investment in the three months to the end of September, the first since records began in 1998.

This suggests that foreign companies are not reinvesting their profits back into China, but are instead moving their funds overseas.

“China is currently facing slowing growth and something needs to be done,” said the Swiss industrial machinery maker, which withdrew 250 million francs ($277 million, £227 million) from China last year. says an Oerlikon spokesperson.

“In 2022, we were one of the first companies to communicate transparently that we expected the slowdown in China's economy to impact our business,” the spokesperson added. “As a result, we started early introducing actions and measures to mitigate these impacts.”

China remains an important market for the company. Nationwide, he has nearly 2,000 employees, accounting for more than a third of his sales.

Oerlikon said China's economy is still expected to grow by about 5% in the coming years, “which is among the highest in the world.”

Since the start of the pandemic, companies like Oerlikon have been grappling with the challenges of operating in the world's largest market.

China had implemented one of the world's strictest pandemic lockdowns through its “zero corona” policy.

This has disrupted the supply chains of many companies, including tech giant Apple, which makes the majority of its iPhones in China. The company has since diversified its supply chain by moving some production to India.

“Not many companies are leaving China. Many of the big multinationals have been in the market for decades, and they're not going to let go of the market share that they've built up over 20, 30, 40 years.” , especially when it comes to new investments. ”

Companies also consider the impact of interest rates. While many countries around the world raised interest rates significantly last year, China bucked the trend.

Many major central banks, including the US Federal Reserve and the European Central Bank, have raised interest rates to combat inflation. Rising borrowing costs with the promise of higher returns are also attracting foreign capital.

Meanwhile, Chinese policymakers have slashed borrowing costs to support the country's economy and struggling real estate industry. The yuan has depreciated more than 5% against the dollar and euro this year.

The European Union Chamber of Commerce in China says companies are spending their profits in China rather than reinvesting them back home.

It added: “Those with surplus cash and earnings in China are increasingly moving their funds overseas, where they can earn higher investment returns compared to investing in China.”

Michael Hart, president of the American Chamber of Commerce in China, said some companies were extracting profits from China as “part of a long-term cycle” of profit-taking “once projects reach a certain size and profitability.” Ta.

“Profit withdrawal does not necessarily indicate that companies are dissatisfied with China, but rather indicates that investment in China has matured.”

Hart said this is “encouraging because it means companies can integrate their China operations into their global operations.”

Canada-based aerospace electronics company Filan Technology Group has invested up to C$10m ($7.2m, £5.9m) in China over the past decade and invested in the country last year and in the first quarter of 2023. Withdrawn CAD 2.2 million from.

“We're not retreating from China at all. We're investing in China to grow our business and then taking the surplus and investing it elsewhere in the world,” said Brad Vaughn, the company's president and chief executive officer. ” he says.

“China has excess cash and bringing it back to finance the recent US acquisition is smart cash management and means less borrowing,” he added.

Analysts say there is a lot of uncertainty about what will happen next, both in terms of interest rates and U.S.-China relations.

Dan Wang, chief economist at Hang Seng Bank China, said the People's Bank of China could move to cut interest rates further this year to support the economy.

Interest rate cuts could put further pressure on the already weak yuan. “There is very limited scope for monetary easing at the moment due to currency pressures,” she said.

“If economic sentiment improves next month, it's safe to say that China will cut interest rates. But if sentiment doesn't improve, the central bank will have to make some very difficult decisions.”

EIU's Marlo said companies are cautiously optimistic about the upcoming meeting between President Xi Jinping and President Biden.

“Direct talks between the two presidents tend to have a stabilizing force on bilateral relations.The past few months have also seen an increase in diplomatic relations between the United States and China, which suggests that the two countries are aiming to improve relations. “The relationship is terrible,'' he says.

“However, it won't take long for the situation to unravel again. Foreign investment into China will continue to be constrained until businesses and investors feel more secure.”