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China Faces First-Ever Quarterly Deficit in Foreign Direct Investment

According to balance of payments data, China had its first quarterly deficit in foreign direct investment (FDI).

China experienced its inaugural quarterly deficit in foreign direct investment (FDI), as per balance of payments data, signaling the challenges Beijing faces in attracting overseas companies amidst global “de-risking” efforts by Western governments. 

The deficit, amounting to $11.8 billion during July-September, marked the first quarterly shortfall since China began compiling this data in 1998, potentially linked to geopolitical tensions leading to reduced investments.

Record-Low Yuan Trading Volume:

Simultaneously, onshore yuan trading against the dollar reached an all-time low volume in October, underscoring authorities’ intensified efforts to curb yuan selling. 

The volume dropped to 1.85 trillion yuan ($254.05 billion), down 73% from August. The People’s Bank of China has urged major banks to limit trading and discourage clients from exchanging yuan for the dollar in response to these challenges.

Strategic Response from Chinese Authorities:

Given these dynamics and their potential impact on the Renminbi (RMB), experts anticipate a strategic response from China’s authorities. 

Tommy Xie, Head of Greater China Research at OCBC, expects continued counter-cyclical interventions, including biased daily yuan fixings and managing offshore yuan liquidity, to support the currency amidst mounting headwinds.

Sustained Efforts to Stabilize the RMB:

To counter the challenges posed by the deficit in FDI and reduced yuan trading, China’s central bank is likely to persist in efforts to stabilize the RMB. 

These measures are anticipated to include managing daily yuan fixings and liquidity in offshore markets, reflecting the authorities’ commitment to safeguarding the currency amid global uncertainties.

Rising Foreign Exchange Outflows:

In September, China experienced a substantial increase in foreign exchange outflows, reaching $75 billion, the highest monthly figure since 2016, according to Goldman Sachs data. 

These outflows highlight the need for strategic and sustained measures to manage the country’s economic stability amidst changing global economic dynamics and investment patterns.

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