China tracked its lowest first quarter in greenfield FDI on record in 2022, as Beijing’s zero Covid-19 policies and wary business sentiment hamper direct investments and drive portfolio investments from the country.

Only 55 projects were recorded by investment monitor fDi Markets between January and March 2021 — a 50.5% drop on the same period the previous year and a decline from the previous record low of 91 projects in 2020. Estimated capital expenditure for foreign direct investment (FDI) into China for the quarter is $2.8bn 

John Evans, managing director of consulting firm Tractus Asia, says that everything has been on hold for foreign investors eyeing China for the past year. 

“There is a high level of suspicion from North American investors about the Chinese market as an investment destination, and European companies who are more willing to invest are unable to travel there,” he says. 

All of this has created a “perfect storm”, he adds, which shows no sign of abating until next year.

The overall drop in the first quarter follows greenfield FDI projects falling to historic lows since the start of the pandemic. 

Of the greenfield investments tracked, the largest was from Hong Kong-based artificial intelligence company SenseTime, which invested $880m in a new data centre in the Lingang Free Trade Zone in Shanghai. 

Excluding Hong Kong, greenfield FDI into China for the quarter stands at 53 projects, worth an estimated $1.9bn.

Meanwhile, in the short-term, Covid-19 remains “the biggest risk to the Chinese economy” as the government pursues its zero-Covid policy, Mr Evans says. “That’s going to limit trade and investment and will continue to pummel the FDI numbers,” he predicts. 

The immediate effects of the lockdowns, such as Shanghai’s city-wide lockdown which started in April, are already showing scars on the Chinese economy. 

The Caixin China General Services Purchasing Managers’ Index (PMI) dropped to 36.2 in April, down from 42 the previous month, marking the second-lowest month since the survey began in 2005. A score of below 50 in the PMI indicates that the majority of businesses reported a contraction in activity compared to the previous month.

Manufacturing did not fall as sharply, but still displayed its lowest reading since the outset of the pandemic. The Caixin China General Manufacturing PMI dropped from 48.1 to 46 — a 26-month low.

In parallel with a decline in direct investments, there have been record outflows in portfolio investments from China.

In March, Institute of International Finance (IIF) tracked net outflows of bonds and equities, worth $11.2bn and $6.6bn, respectively, in what contributed to the “largest quarterly outflows on record”. In April, the IIF registered debt outflows worth $2.1bn from China and inflows into equities worth $1bn.

“Capital flight stands in sharp contrast to the large inflows in 2020/21, when investors increased their exposure to Chinese bonds by 30–40% each year,” Jonathan Fortun, an economist at the IIF, wrote in a note.

While other emerging markets have suffered non-resident portfolio outflows in the wake of the Ukraine war, the IIF remarks that the situation in China is “radically different”. 

“A combination of Covid-19 lockdowns, depreciation and perceived risk of investing in countries whose relationships with the West are complicated may be the main drivers of recent capital outflows from China,” Mr Fortun continued.