(Bloomberg) -- A measure of foreign investment into China turned negative for the first time since records began in 1998, highlighting how foreign companies are pulling money out of the country due to geopolitical tensions and higher interest rates elsewhere.

China’s direct investment liabilities in its balance of payments declined by $11.8 billion in the third quarter, the country’s foreign exchange administration said. The measure records monetary flows connected to foreign-owned entities in China.

Economists have said the decline in FDI by the balance of payments measure reflects less willingness by foreign companies to re-invest profits made in China in the country. That’s due to strained ties with the West and the rising attractiveness of keeping cash overseas. Advanced economies have been raising interest rates while China has been cutting them to stimulate the economy.

“Probably this reflects foreign firms repatriating earnings from China, whereas previously they reinvested them,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics. “International firms, especially US ones, have been reconfiguring supply chains to use alternatives to China.”

China’s other main measure of foreign direct investment inflows, released by the commerce ministry, reached 920 billion yuan ($125.8 billion) in the first three quarters of this year, down 8.4% compared with the same period in 2022. That measure is impacted by the decline in the Chinese currency’s value relative to the US dollar this year.

Foreign companies in China operating in export-oriented and industrial sectors have seen their profits fall this year, as the value of China’s exports has declined and a property slump hit demand for industrial goods. Foreign-invested industrial companies profits in China fell by 10.5% in the first three quarters of 2023 compared to the same period last year, according to China’s statistics bureau.

The balance of payments data could mean “there are more divestments than new investments,” said Michelle Lam, Greater China economist at Societe Generale SA. “That’s quite concerning. I think it’s just continued diversification of supply chains. Confidence will take time to recover following the more supportive measures.”

China sees investment by international companies as key to upgrading its economy and has stepped up efforts to woo foreign investors this year. Top officials have given assurances to overseas chief executives, and government departments had meetings with global companies to ask for policy suggestions. China’s President Xi Jinping met with Microsoft Corp. co-founder Bill Gates in Beijing in June.

Overseas business lobby groups in China have called for concrete actions to address their concerns, which range from local protectionism to an unpredictable regulatory environment and crackdowns based on national security concerns.

China’s Premier Li Qiang “has a good track record on foreign investment, having securing Tesla’s investment in Shanghai, and is likely to be proactive in seeking foreign investment,” Wrigley added. “But he faces a tough challenge, given the tepid outlook for China’s consumption recovery and geopolitical tensions.”

As well as FDI, foreign portfolio investment in Chinese companies has been weak this year due to concerns about economic growth and better returns elsewhere. Foreign funds sold 172 billion yuan worth of mainland shares in the three months ending October. That threatens to turn this year’s foreign flows negative for the first time since China opened a second mainland-Hong Kong stock trading link in late 2016.

Foreign institutional investor holdings of bonds in China’s interbank market fell from a record 4 trillion yuan in 2021 to 3.19 trillion yuan at the end of September, according to data released by China’s central bank.

“Detailed data on portfolio investment and other investment are not released yet, but these two channels likely still showed outflows in Q3 as foreigners’ net sold RMB assets in the quarter,” economists at Goldman Sachs Group Inc. led by Maggie Wei wrote in a note. “Capital outflow pressures may persist in light of the unfavorable interest rate differentials.”

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