China's Direct Investment in South Korea Plunges on Restrictions

  • Direct investment into South Korea falls 63% in 1Q-3Q
  • Investment from Japan increased 90% over the same time

China’s direct investment into South Korea has dropped drastically as Beijing curbs overseas investment and restricts foreign-currency transfers to maintain its reserves, according to the South Korean government.

Direct investment from mainland China dropped 63 percent to $608 million during the first three quarters of this year from the same period last year, according to a statement from South Korea’s trade ministry. Meanwhile, investment from the U.S. fell 5.5 percent while that from Japan surged 90 percent as Japanese companies sought more opportunities outside their home market, where they face an aging and declining population, the ministry said.

China formally laid down new rules on overseas investments in August, making explicit its de facto campaign against “irrational” acquisitions of assets in industries ranging from real estate to hotels and entertainment.

This has seen outbound investment globally from China contract 42 percent to $68.7 billion in the first eight months of this year, according to data from the Ministry of Commerce.

"China’s policy may continue to restrict investment into South Korea, which needs to be monitored given the close economic ties,” said Chang Jaechul, chief economist at KB Investment & Securities Co.

The drop in investment also comes amid increased tension between Beijing and Seoul over the deployment in South Korea of the Thaad missile-defense system. South Korean companies such as Lotte Shopping Co. and Hyundai Motor Co. are facing difficulties with their operations in China, and restrictions by Beijing on package tours to South Korea have cost the tourism industry billions of dollars. The Bank of Korea has previously estimated that the dispute could cut 0.3 percentage point from economic growth this year.

KB Investment’s Chang said Thaad may have affected the investment but that the main reasons seem to be limits on outbound flows and maintaining foreign-currency reserves.

Total foreign direct investment in South Korea dropped 9.7 percent to $13.6 billion in the first three quarters from the same period last year. The ministry’s figures measure investment plans reported to South Korean agencies during the period, as opposed to actual flow of funds.

The ministry said other uncertainties affecting the investment outlook include expectations for another rate hike by the Federal Reserve and Brexit negotiations, while the global economic recovery raises the potential for large merger-and-acquisition transactions and investment in new industries, it said.

— With assistance by Miao Han

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