Asia
In this week's letter, we look at direct investment flows across Asian economies. We find that there has been a discernible decline in foreign direct investment (FDI) across several economies in the region in recent quarters. This dip in investment activity can be attributed to various factors, including shifts in investor sentiment towards the recipient economies.
Additionally, we explore outbound direct investment flows from these economies. Hong Kong remains the primary intermediary for mainland China's investment flows, underscoring its crucial role in facilitating cross-border investments. Conversely, Japan, boasting the world’s largest stock of net international assets, maintains a strong preference for the United States as its favored investment destination. This preference underscores the enduring ties and strategic partnerships between the two nations.
Finally we shift our focus to scrutinize specific economies in Southeast Asia, where we observe a noteworthy recovery in FDI inflows following the pandemic. We find that investor interest in pivotal themes such as the energy transition and the digital economy has played a vital role in propelling these flows. We note, nevertheless a slight retracement in these flows in 2023.
China Foreign direct investment (FDI) in China has plunged in recent months, based on the standard measure adopted by the Ministry of Commerce. Monthly actual utilized FDI has consistently shown double-digit year-on-year declines throughout the year so far, with the contraction worsening to 38.2% in March (Chart 1). Additionally, China’s direct investment liability flow plunged to under 300 billion yuan in 2023, from 1.25 trillion in 2022. Analysts attribute China’s FDI declines to various factors, including domestic growth risks and ongoing tensions with other countries, such as the United States. However, the impact on growth may be nuanced, as business investment within China is predominantly domestically sourced. The outlook on China’s broader economy however, remains uncertain, with April’s economic data presenting a mixed picture. Specifically, growth in retail sales and fixed asset investment slowed further in April, while industrial production logged an unexpected growth rebound.
