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Foreign Investors Flee China for Emerging Markets Amid Deflation, Trade Woes

Foreign direct investment is retreating from China more sharply than from other emerging markets, driven by significant trade diversion and deflationary pressures. Financial decoupling, a trend accelerating after the Covid-19 pandemic, is evident in stagnant portfolio and bank-intermediated flows into China. Geopolitical tensions, including fears of a move on Taiwan following Russia's invasion of Ukraine, are contributing to investor caution. Meanwhile, independent analysis suggests China's real GDP growth for 2025 could be as low as 2.5-3%, starkly below official targets, due to weak investment and domestic demand.

Key Points: Foreign Investment Retreats from China to Emerging Markets

  • FDI to China falling faster than rest of EM
  • Trade diversion pushing China into deep deflation
  • Financial decoupling trend post-Covid
  • Geopolitical fears over Taiwan a factor
  • 2025 GDP growth estimated far below official target
2 min read

Foreign investors retreat from China, move to emerging markets

Analysis shows FDI and portfolio flows leaving China for other EMs due to deflation, trade diversion, and geopolitical fears, with growth estimates slashed.

"The narrative that China is impervious to US tariffs is wrong. - Robin J Brooks"

New Delhi, Jan 17

The world is financially retrenching from China, with foreign direct investment flows falling more precipitously than to the rest of emerging markets, according to Robin J Brooks, Senior Fellow at the US-based nonprofit Brookings Institution.

In an article on online publishing platform Substack, he writes that the "narrative that China is impervious to US tariffs is wrong".

"You just have to look at the massive scale of trade diversion that's happening to see that, which is pushing China into deep deflation," said Brooks.

Moreover, trends in foreign portfolio flows and other investment flows also point in the same direction.

"The former are flows into Chinese stocks and bonds, while the latter are bank-intermediated flows like trade finance and cross-border loans," Brooks noted.

The "financial decoupling" predates this year's tariffs and is a longer-running trend that emerged after the Covid-19 pandemic, said former Chief Economist at IIF, as he shared four charts to substantiate his view points. The graphs show that something clearly changed after Covid in China.

"As flows to the rest of EM rebounded, flows to China are basically flat. The only historical parallel is the 2015/6 RMB devaluation scare, but there's obviously nothing similar going on now," the economist argued.

The author said Russia's invasion of Ukraine plays a role, because foreign investors fear a similar move by China on Taiwan.

"But -- obviously -- it's impossible to say with certainty what's driving capital flows in any given moment," he added.

Meanwhile, China's real GDP growth in 2025 is expected to be at about 2.5-3 per cent, far below the government's stated target of around 5 per cent, raising critical questions about the true health of the world's second-largest economy, the reliability of official statistics, a report has said.

The report from Mizzima News said that the gap is driven mainly by a sharp decline in fixed assets and property investment, persistent producer‑price deflation, and enduring weakness in domestic demand, which could slow growth further in 2026.

It cited estimates of the US-based Rhodium Group's analysis and said Beijing's data for the first three quarters showed 5.2 per cent year‑on‑year expansion, which also stands in sharp contrast to the independent estimate.

The report highlighted that fixed‑asset investment turned negative by mid‑2025, and a collapse in property sector investment dragged down broader capital formation.

- IANS

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Reader Comments

A
Arjun K
The mention of Taiwan is crucial. Geopolitical risk is a major factor for investors now. Stability matters. While this is a chance for India, we must also ensure our own foreign policy is clear and consistent to build long-term confidence.
R
Rohit P
The property sector collapse is something we should watch closely. Our real estate market has its own challenges. Hope our regulators are learning from this to prevent a similar bubble here. Affordable housing is the need, not speculative investment.
S
Sarah B
Interesting analysis, but we must be cautious. A sharply slowing Chinese economy isn't good for global growth either. It affects demand for commodities and finished goods, which impacts many Indian exporters. It's not a simple zero-sum game.
V
Vikram M
The gap between official stats (5.2%) and independent estimates (2.5-3%) is staggering. It raises a valid point about reliability of data. Transparency is key for investor trust. Our statistical agencies must maintain their credibility at all costs.
K
Karthik V
"Financial decoupling" is the key phrase. Post-Covid, companies are looking for supply chain resilience, not just low cost. India's PLI schemes are timely. But we need faster execution on the ground. Bureaucratic delays can still scare away investors looking for an alternative to China.

We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.

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