Will People Keep Investing In China after COVID-19?

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Last year, China recorded the highest level of foreign direct investment in its history. This came despite the trade war with the US.

China was the second-largest recipient of FDI after the United States. And about a quarter of it was directed to manufacturing, while 15% of it was into high tech and computing.

The breakdown shows how China has been moving from being a manufacturing hub towards higher added value products.

This isn’t a unique path, as a matter of fact. Japan went through a similar process after WWII, leading many observers to project that China would, in the future, be at least economically similar to Japan.

Investment in manufacturing was already starting to be superseded by other activities before the start of the new decade.

All your eggs in one basket

China had, for several years, realized that it couldn’t – and didn’t want to – remain the world’s manufacturing center.

The trade war just made the country’s leaders redouble efforts already underway to turn the economy’s focus to domestic demand. The COVID-19 outbreak exposed a distinct flaw in concentrating so much manufacturing in one country.

Apparently, China had been aware of this problem for a long time. In fact, it had been looking to address it.

On the one hand, China has been seeking to secure diversity in its raw material sourcing. On the other, it has also been working to become independent from foreign demand and world economic swings.

Meanwhile, the rest of the world continued business as usual.

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It’s not a change, just an acceleration of an already existing pattern

As China shut down manufacturing to stop the spread of COVID-19, analysts were suddenly aware of potential supply problems. This was a slight economic headache, that could be solved by China beating the virus and reopening the economy.

But when the virus spread around the world, and everyone was desperately seeking vital medical supplies… the lack of domestic production became an acute issue.

Many have pointed to China offering masks, ventilators and other equipment as a goodwill gesture attempting to gain diplomatic presence. But there is another motive: if too many countries can’t get vital supplies because they are all made in China, they will be a lot more interested in “bringing home” certain industries.

It’s a little too fast

In the long run, perhaps China would be happy to focus on more tech industries. However, they aren’t in a position to do that just yet. China still needs foreign investment to support its massive economic growth.

With the world economy practically shut for an extended period, there will be little “extra” money for investments in the short term. The next six months might simply be a period of taking stock and trying to return the world economy to some semblance of normal.

To be sure, China will play a role in that.

But, with virtually every company in the world cutting capital expenditure, new investment into China is going to be on hold for a while. Given the “reset”, companies will likely reassess their capital programs and strategies.

While expansion into China would have seemed like the logical next step in 2019 that would happen by inertia, come the end of 2020, that might not be the case.

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