Foreign investment in China falls to 30-year low

The release of foreign direct investment statistics showing inbound investment into China is at a 30-year low (US$33 billion) raises questions about the health of China’s economy and what Western investors should do about China’s financial markets. It’s raising questions.

Despite China being the second largest economy, little is known about what is actually going on in China economically and politically. Over the past decade, Western investors have de-emphasized major economic indicators such as GDP in favor of micro-indicators such as electricity usage, out of concern that official indicators “don’t tell the true story.” Politically, there is a sense that China is not an “open book” and therefore reading the government’s intentions is even more difficult.This lack of clarity is keeping investors away from China.

Reflecting that, Chinese assets are underperforming and valuations are currently very low. For example, compare Alibaba’s performance to AmazonAMZN’s performance. That may lead some to wonder if investors’ concerns about China are being priced in.

Specifically, those concerns include U.S.-China relations and the risk of conflict over Taiwan, structural risks to China’s economy (European readers will be aware of the risks to China’s real estate market), and It relates to three broad areas of apparent lack of urgency. Economic policy planning.

Some of these risks are fading for the time being. Taiwan’s presidential election ended successfully, and diplomatic communication between the United States and China has improved.

Economic risk remains. China wants and needs to grow at a rate of nearly 4% over the next decade to keep its “grand plans” on track. Although there have been no major economic downturns in recent decades, the result is that the elements of a structural recession may have accumulated, particularly overcapacity, inefficient investment, and high levels of debt. External risks still remain. A new trade war with the US (if Trump is re-elected) and a strong European response to electric vehicle dumping are just two scenarios.

My feeling is that when a large market is deemed “uninvestable”, as was the case in the euro area in the mid-2010s, it’s time to start warming up the investment case. Prices are low in China, but there is still no catalyst in the form of overwhelming economic stimulus or a kind of mini-crisis (trade war, debt collapse).