According to a Rhodium Group research, American and European businesses are diverting their investment away from China and into other emerging economies. The majority of this capital is being diverted to India, followed by Mexico, Vietnam, Malaysia, and then China.

These businesses are abandoning the second-largest economy in the world even as its contribution to global growth rises. This shows how foreign investors are deeply concerned about the business climate, economic recovery, and political situation in China.

According to the research released on Wednesday, the value of declared American and European greenfield investment in India increased by over $65 billion or 400% between 2021 and 2022, whereas investment in China decreased 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.

The first foreign businesses were drawn to China in the late 1980s when the nation abandoned its Maoist economic model due to low production costs and the possibility of a sizable middle class. The market is also losing its lustre as a result of consumers’ current tightening of their purse strings and production costs’ continued increase.

The change occurs as local government officials in China attempt to resurrect foreign investment after a financially devastating epidemic and a property crisis emptied their wallets.

According to the research, Western businesses are increasing greenfield investment in these markets to expand their options for sourcing completed goods and commodities with high geopolitical stakes, such as semiconductors, and to lessen their reliance on China in their supply chains.

The markets that Western companies are investing in are highly dependent on trade and investment with the Asian giant themselves, thus the authors issued a warning that diversification is unlikely to result in a swift drop in exposure to China.

In light of this, “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.”

(Adapted from Reuters.com)

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