US and European corporations are transferring investment away from China and towards other developing economies, with India getting the great bulk of this diverted foreign money, followed by Mexico, Vietnam, and Malaysia, according to a report from Rhodium Group.
These firms are abandoning the world’s second-largest economy even as its share of global growth rises, demonstrating how international investors are concerned about China’s business climate, economic recovery, and politics.
According to the research, declared US and European greenfield investment in India increased by $65 billion, or 400%, between 2021 and 2022, whereas investment in China fell to less than $20 billion last year, from a peak of $120 billion in 2018.
“Diversification is well underway,” the research organisation said, but acknowledging: “it will take years for advanced economies to achieve the objectives behind their ‘de-risking’ policies,” as China is so central to global supply chains.
Low production costs and the prospect of a massive middle class drew the first foreign firms to China in the late 1980s, as the country abandoned its Maoist economic model. But with consumers now tightening their purse strings and production costs continuing to rise, the market is losing its sheen.
The shift comes as Chinese local authorities struggle to revive foreign investment after an economically bruising pandemic and property crisis depleted their coffers.
Western companies are stepping up greenfield investment in these markets to give them options when sourcing assembled goods and geopolitically sensitive commodities, such as semiconductors, as well as to reduce their dependence on China in their supply chains, the report said.
However, the authors cautioned that diversification is unlikely to result in a rapid decline in exposure to China because the markets foreign firms are investing in are heavily reliant on trade and investment with the Asian giant themselves.
As a result: “it would not be surprising to see China’s overall share of global exports, manufacturing and supply chains continue to rise, even as diversification away from China accelerates.”
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