For an economy that had been the apple pie of the eye of global investors for many decades, China’s deficit in foreign direct investment (FDI) in the July-September quarter of 2023 is momentous news. For the quarter, it reported an FDI deficit of $11.8 billion. This means that instead of foreign money entering China to create real assets, overseas investors pulled money out of the country last quarter. This mega reversal is a first, or at least unseen since 1998, when the country’s forex regulator began compiling this data. It reflects a de-risking underway of global value chains (GVCs) away from China, mostly in line with the ‘China plus one’ strategies adopted by global businesses in response to covid supply snarls. The pandemic had exposed over-reliance on Chinese factories as a glaring risk. At another level, it may also reflect a geopolitical rupture playing out as a kind of Cold War II, globalization as usual having taken a recent blow from the war in Europe and a flare-up in West Asia posing another threat, amid talk of a Moscow-Tehran-Beijing axis looking to topple today’s ‘Pax Americana’ order. As it happens, the Chinese economy is in a slump and may remain too weak to get GDP growth back near double digits (its pre-pandemic ‘normal’). But then, Beijing did itself no favour by taking an autocratic turn, with business crackdowns, power exertions and other statist moves since its recent re-embrace of socialism (the version with “Chinese characteristics") after a long market-oriented run of FDI-fuelled growth.
Communist China’s economic rise began in the late 1970s, with market reforms justified by Deng Xiaoping’s famous words on ideology: “It doesn’t matter whether a cat is black or white, as long as it catches mice." On its part, the US had spotted a chance to split labour-rich China away from Soviet influence via trade ties. After the Berlin Wall in Europe fell and the Cold War ended, China drew FDI in such bulk that it was taken as a theme track for its sizzling output growth as well as export success. After its entry this century to the World Trade Organization, it shipped its way up the league. China’s integration with global trade, the US had held, would turn it more democratic. Hindsight now tells us that China was merely biding its time on that front. History hadn’t ended with the Cold War and the US-set world order remains in the cross-hairs of its discontents.
In all this, India has cleverly positioned itself as a hospitable place for the West’s megacorps to diversify their GVCs. India’s FDI inflows have been on an uptrend this century, peaking at just under $60 billion in 2020-21 (thanks to tech deals), before slipping 1% the following year and then 22% to $46 billion in 2022-23. India drew almost $11 billion in the quarter ended June, a 34% year-on-year drop. While this data doesn’t reveal a GVC-rejig FDI boom, we clearly do have an opportunity to become the world’s next mega factory. To make the most of it, though, the government must keep its policy choices adaptive. Many moves have been made and schemes launched to attract GVCs and position India as a hub for manufacturing, but, policy-wise, what is not working must be changed as soon as evidence of it emerges. Under watch in this context are a corporate tax cut, production linked incentives, import restrictions, trade-bloc aversion (in favour of bilateral ties) and an import tariff ‘up-creep.’ We would need far more than a marquee MNC win (a la Apple Inc) or two for FDI levels to soar.
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