China: Capital Account Imbalance with Overseas Investment Continues to Widen

■ Affected by Russia's invasion of Ukraine and China's economic downturn, foreign capital investment in China has decreased since 2022.  

■ China's outbound investment, on the other hand, has grown rapidly. Under a mechanism different from traditional globalization, the imbalance in capital transactions has accelerated. 
 
Last month, in *PRESTIA Insight*, I focused on changes in assets in China's financial account and discussed China's outbound investment. The article noted that China's outbound investment focus is gradually shifting from direct investment to securities investment. Against the backdrop of escalating Sino-US confrontation and rising concerns about economic security in various countries, the overseas expansion of Chinese companies is slowing down. 
 
Significant changes have also occurred in China's financial accounts in recent years regarding changes in liabilities reflecting foreign investment in China. Domestic investment refers to the inflow of capital from overseas; if the inflow exceeds the outflow, it is recorded as a surplus. However, since 2022, the number of periods with deficits has increased, indicating that capital has begun to flow overseas. Looking at the sub-items, the deficit in securities investment is particularly pronounced, while the surplus in direct investment has shrunk significantly since 2022. Regarding securities investment, the main reason is believed to be the sluggish Chinese economy caused by factors such as the worsening real estate downturn, leading to a decline in the expected rate of return for overseas investors. On the other hand, in the area of direct investment, the impact stems from overseas companies' increasingly stringent assessments of China's country risk. Since Russia invaded Ukraine in February 2022, the market has begun to pay more attention to the potential economic sanctions imposed by Western countries in the event of unforeseen circumstances, as well as the costs associated with possible asset confiscation by the Chinese government. These factors are presumed to have affected direct investment in China. Although the causes and main actors of securities investment and direct investment differ, it is evident that Western investment in China is being suppressed, and capital outflows are accelerating. 
 
The cumulative result of these capital flows—the balance of foreign assets and liabilities (as of the end of September 2025)—while including market value changes, shows an overall continuous upward trend. Foreign assets (US$11.5073 trillion) were primarily driven by the increase in foreign exchange reserves in the first half of the 2010s, but since the mid-2010s, they have been gradually accumulated mainly by the private sector. In the latter half of the 2010s, under the "Belt and Road" initiative, direct investment and other investments (mainly loans) grew rapidly, while in recent years, securities investment has become the dominant driver. Among direct investment and securities investment, equity investment (including fund shares) has increased significantly. In contrast, direct investment, which accounts for about 50% of foreign liabilities ($7.4597 trillion), has seen sluggish growth since 2022 due to a slowdown in capital inflows. Consequently, net foreign assets ($4.0476 trillion) nearly tripled between the end of 2021 and the end of September 2025. Triggered by Russia's invasion of Ukraine, overseas capital has gradually withdrawn from China, while Chinese capital has accelerated its overseas equity investment. Under mechanisms different from traditional globalization, the imbalance in capital transactions is widening at an accelerated pace. This trend symbolizes the continued advancement of global economic fragmentation.