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Coronavirus Woes – Global Investment & China

A March 26, 2020 report from UNCTAD (United Nations Conference on Trade and Development) suggests that the global coronavirus pandemic could cut global foreign direct investment (FDI) by as much as 40%. This represents a significant downward shift from previous projections, which had anticipated FDI would decrease by just 5-15%. Chinese data reported a 10.8% reduction in foreign investment into the county over the first three months of 2020 – including a single month fall of 25.6% in February. With some observers theorizing that current global economic conditions and underlying structural issues could lead to a global recession, these numbers may represent the beginning of a prolonged disruption to global flows of capital. How is China responding to this unprecedented shift?

Chinese Premier Li Keqiang, speaking after a State Council executive meeting in early March, said that China “must implement targeted policies to arrest the slide in foreign trade and foreign investment, to forestall damage to the wider economy.” China’s Ministry of Commerce (MOC) has officially stated that it will work to stabilize foreign investment into the country by “reducing the number of sectors in the so-called negative list” and “closely monitor[ing] the progress of key foreign investment projects in the country.” China’s countrywide “negative list” – essentially outlining sectors where foreign investment is restricted – was introduced as part of a new foreign investment law, which came into effect on January 1, 2020. China will speed up the process of shortening the negative list, in addition to expanding the “Catalogue of Encouraged Industries” for foreign investment. Although it is unclear which sectors will be included, this is expected to focus on “high-quality development of the manufacturing sector” and developing the “potential of China’s central, western and northeast regions.”

The Wall Street Journal also reports that Chinese officials have been working with foreign-invested enterprises to resolve coronavirus-related business concerns and “vowing to continue opening up the market and to treat domestic and foreign companies hit by the epidemic equally, for example, in rolling out tax-relief policies.” This effort has also included direct assistance for foreign manufacturers and special logistics clearances for foreign automakers. China also announced that it would push ahead with the annual Canton Fair – the country’s largest trade expo – in an online format. MOC spokesperson Gao Feng noted on April 9th that 76% of “foreign trade firms” had recovered 70% of their production capacity thus far. With China seemingly months ahead of the West in terms of coronavirus recovery, taken together, this paints an optimistic picture for foreign firms operating in the country, albeit with special considerations for those foreign firms dependent on exports from China, given the prospects of a global recession,

The coronavirus pandemic also comes amid an already pronounced fall in China’s outbound direct investment (ODI). This number declined by 8.2% in 2019, according to official Chinese government statistics. The United States as a destination for PRC FDI (down 93% from 2016 levels, according to Rhodium Group), Canada (down 74% between 2017 and 2018, according to the CIUA Investment Tracker) and the European Union (down 40% between 2018 and 2019, according to a joint Rhodium Group/Baker McKenzie report) have all seen pronounced dips in Chinese investment due to increased regulatory oversight, market factors, and capital controls – among other factors. And while some well-positioned, cash-rich Chinese investors are reportedly looking to acquire distressed assets abroad for cheap prices, they are reportedly “facing hurdles as more governments seek to deter foreign takeovers of local firms.”

With both the U.S. and China having introduced new measures easing foreign investment regulation (FIRRMA and the Foreign Investment Law of the People’s Republic of China, respectively), the aforementioned Baker Mackenzie report predicted, in January, that there was room for optimism and even the possibility of a return to modest growth in 2020. Observers are now simply hoping for the best, with the outbreak (and lack of a concrete recovery timeline) fueling even more uncertainty than before.

The China-Canada investment relationship is perhaps even more fraught. It seems unlikely that investment will return at any time in the foreseeable future to the peak levels of 2013, as Chinese investment has long moved away from the once lucrative Canadian energy sector. According to data from the China Institute Investment Tracker, recent investment has largely shifted towards the Metal and Minerals sector, which made up 95% of new Chinese investment in 2019. Investment has also jumped in the Health & Biotechnology and Agriculture & Food sectors, although for relatively small sums.

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