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The outflows show interest rates, U.S. tensions and a weak economy are sapping China’s investment appeal

SINGAPORE—For years, foreign companies plowed the profits they made in China back into China, using the cash to finance new hiring and investment as its giant economy expanded rapidly.

Now, as growth slows and tensions between Beijing and Washington rise, they are pulling those profits out.

Foreign firms yanked more than $160 billion in total earnings from China during six successive quarters through the end of September, according to an analysis of Chinese data, an unusually sustained run of profit outflows that shows how much the country’s appeal is waning for foreign capital. The torrent of earnings leaving China pushed overall foreign direct investment in the world’s second-largest economy into the red in the third quarter for the first time in a quarter of a century.

The outflows add to pressure on China’s currency, the yuan, when the country’s central bank is already battling to slow its decline as investors sour on Chinese stocks and bonds and new investment in China is scarce. The yuan has depreciated 5.7% against the U.S. dollar this year and touched its lowest level in more than a decade in September.

A range of factors have contributed to the profit exodus, economists and corporate executives say. Those include a widening gap between China’s interest rates and those in the U.S. and Europe that has made it more attractive to park earnings in the West. While the Fed and other central banks have been raising rates to fight inflation, China has been cutting them as policy makers battle a prolonged downturn in its real-estate market.

But many foreign firms are looking for better uses for their money, as China’s economy slows and geopolitical tensions rise. Chilly relations between Beijing and the U.S.-led West have pushed global companies to rethink their supply chains and exposure to China.

“Corporates are beginning to de-risk from China,” said Peter Kinsella, global head of foreign-exchange strategy at Union Bancaire Privé.

Firan Technology Group, an aerospace electronics company based in Toronto, pulled around 2.2 million Canadian dollars, equivalent to $1.6 million, from China in 2022 and the first quarter of 2023, said Chief Executive Brad Bourne. The company invested between eight million and 10 million Canadian dollars to expand its business in China over the past decade.

The main reason for withdrawing cash from China was to help finance two recent acquisitions in the U.S., Bourne said. But he added that deteriorating ties between Washington and Beijing are a concern for the company. “For sure, there are more uncertainties as to what will happen regarding tensions between China and the West/U.S.,” he said. “So having large sums of money there has some risk.”

Unlike most other major economies, China doesn’t distinguish between reinvested profits and new or “greenfield” foreign investment in its balance of payments, a record of a country’s international transactions.

China’s Ministry of Commerce, however, does publish monthly data on greenfield investment. By subtracting those data from the direct investment sums recorded in China’s balance of payments, economists can get a rough estimate of the flow of profits being reinvested in China or being pulled back overseas.

The data show that for all but two quarters between 2014 and the middle of last year, foreign firms were reinvesting more in China than they were transferring abroad. In 2021, for instance, firms reinvested a net $170 billion.

That shifted in the middle of 2022, when China was under sporadic lockdowns and the U.S. Federal Reserve began raising interest rates to combat rocketing inflation. Outflows have continued in each quarter since.

“Could this be a canary in the coal mine for future investment intentions? It’s possible,” said Alex Etra, senior macro strategist at Exante Data, which tracks global capital flows.

Recent surveys of U.S., European and Japanese companies in China show executives are souring on new investments there, unnerved by the prospect of conflict with Taiwan and China’s efforts to tighten oversight of foreign firms operating within its borders. Overall foreign direct investment in China was negative in the third quarter, with outflows of capital exceeding inflows by $11.8 billion—the first negative quarterly outflow recorded in balance-of-payments data that starts in 1998.

The U.S. has imposed restrictions on American investment in China in sensitive sectors such as artificial intelligence and has prohibited the export to China of high-end computer chips, fearing they could be used by its military.

China has imposed exit bans on certain employees of foreign companies and earlier this year raided the offices of some consulting firms providing services to multinational companies. The government has also broadened its anti-spying laws to counter perceived foreign threats in ways that could encompass routine corporate activities.

Some firms have disclosed that they are taking profits out of China, though without giving many details. Swiss materials-technology company Oerlikon said in February it pulled 250 million Swiss francs, equivalent to $276 million, from China in 2022. A spokeswoman described the transfer as routine, saying the company regularly moves cash between major markets.

Georgia-based Chart Industries, which makes cooling systems, said in October it repatriated $35 million of cash from China in the first nine months of the year. The company didn’t respond to a request for comment.

Austrian engineering group Andritz, which makes machinery for the hydropower, paper and steel industries, said in July it chose to bring funds home from China this year to finance investments and acquisitions worldwide, though it didn’t say how much.

“In previous years, we made substantial investments in China to capitalize on the growing market opportunities in China and Southeast Asia. The returns from these successful investments will be utilized to fund future investments and further acquisitions within our group worldwide,” said a spokeswoman for Andritz.

The repatriation of companies’ earnings is part of a broader outflow of foreign capital from China as investors have soured on the country’s financial markets. Higher rates and bond yields in the U.S. have also made Chinese stocks and bonds far less attractive to global investors.

Foreign institutions have cut their holdings of yuan-denominated Chinese bonds by the equivalent of more than $110 billion since the start of 2022, after accumulating the securities for years. The exodus began the same month that Russia invaded Ukraine, and market participants have pointed to the geopolitical risks of investing in Chinese assets as a major reason.

Yields on Chinese government bonds last year also fell below comparable U.S. Treasury debt for the first time in more than a decade. That gap has since widened.

More recently, global investors have also become net sellers of stocks listed in mainland China. From August to October, they pulled more than $23 billion from yuan-denominated shares via a trading link between Hong Kong and stock exchanges in Shanghai and Shenzhen, according to data provider Wind.

These outflows have weighed on the yuan. The weaker currency has motivated companies to repatriate their earnings sooner rather than later, said Ju Wang, head of Greater China foreign-exchange and rates strategy at BNP Paribas.

“If anything, the outflow is driven by foreigners finding better investment opportunities elsewhere,” Wang said.

Telecom Italia said the sale would help it reduce debt by about €14 billion, with the deal expected to close by summer 2024

The board of Telecom Italia TIT 0.39%increase; green up pointing triangle SpA has approved the sale of its fixed-line network to KKR KKR 4.04%increase; green up pointing triangle & Co. for more than $20 billion, part of a plan by the former monopoly to reduce increasingly unmanageable amounts of debt.

The Italian telecommunications company said late Sunday that it had voted 11-3 to accept the binding offer by the U.S. private equity group for Telecom Italia’s fixed-line and other assets.

The deal is valued at 18.8 billion euros ($20.18 billion) including debt, and could reach up to €22 billion in the event certain regulatory changes and sector incentives are introduced, the company said in a press release.

Telecom Italia said the sale would help it reduce debt by about €14 billion, with the deal expected to close by summer 2024. Italy’s top phone company has a debt burden of more than €25 billion.

France-based Vivendi SE, a 24% shareholder of Telecom Italia, criticized the board’s decision to accept the deal without a shareholders’ vote. It said in a press release that it would use “any legal means at its disposal” to challenge the decision.

The Telecom Italia board also called KKR’s nonbinding offer for Sparkle, the Italian company’s submarine cable business, unsatisfactory. It said it would give KKR a deadline of Dec. 5 to make a binding offer at a higher valuation.

Consulting firm spun off from PwC in 2018

Bain Capital is close to acquiring Guidehouse, a consulting firm that advises government organizations and businesses, in a deal valuing it at $5.3 billion including debt.

An agreement could be announced as soon as Monday, according to people familiar with the situation, barring any last-minute delays.

The move is the latest by private-equity firms to scoop up professional service providers as consulting growth in certain areas slows. It is also a rare deal for an asset class that is struggling to find exits and to return capital to awaiting limited partners.

In 2018, Veritas Capital, which invests in businesses at the intersection of government and technology, acquired the U.S. public-sector consulting business of Big Four accounting firm PricewaterhouseCoopers for an undisclosed price and rebranded it as Guidehouse.

Guidehouse provides management and technology consulting and other services to federal-government agencies including the Departments of Defense, Homeland Security and Veterans Affairs, and to state and local governments, as well as businesses.

Based in McLean, Va., Guidehouse has expanded in a series of its own acquisitions, including Navigant Consulting in 2019, Dovel Technologies in 2021 and Grant Thornton’s public-sector advisory practice last year. The purchases, along with in-house development, helped fuel Guidehouse’s growth, bringing its annual revenue from nearly $600 million in 2018 to an expected more than $3 billion for 2023, the firm said.

Private-equity firms stepped up their deal making in the U.S. consulting industry in 2021 and 2022 after a lull the prior two years, but that rebound came to a halt this year as buyers and sellers across sectors butt heads over pricing.

This year, firms have seen a lull in merger and acquisition activity, mirroring the overall landscape for deals in the U.S. Private-equity firms have had fewer realizations, with the number of exits—or sales of companies owned by the firms—falling by 46% in the third quarter from the prior-year period.

In the U.S., there have been 31 management-consulting M&A deals by private-equity firms totaling $100 million this year through Nov. 2, compared with 37 such transactions across $1 billion the prior-year period, according to research firm Dealogic.

The Guidehouse deal comes as the pace of consulting revenue growth slows for many providers of these services. U.S. consulting is expected to grow by 8% to $94 billion this year, down from 10.5% last year and from 11.1% in 2021, according to consulting-industry data provider Source Global Research. Globally, the consulting market is projected to expand by 8% this year to about $250 billion, following a 10.7% increase in 2022, Source Global said.

Transport commissioner says Brussels needs ‘detailed explanation’ after ticket prices rose 30% over summer

Brussels is probing the recent rise in air fares across Europe after airlines pushed up prices by as much as 30 per cent over the summer, leading to bumper profits.

Adina Vălean, the EU’s transport commissioner, told the Financial Times that EU officials were “looking into detail . . . of what is exactly going on in the market and why”.

The European Commission does not have the power to regulate air fares, but Vălean’s intervention adds to pressure on airlines over the recent price rises, triggered by a travel boom and supply chain issues. She said she was seeking explanations from airlines about the rise in fares and the potential barriers to connectivity in the bloc.

Average air fares across Europe were between 20-30 per cent higher over summer 2023 compared with 2019, according to EU data released in October in response to a question in the European parliament.

Vălean said she had no plans to intervene in the “functioning” aviation market but the commission needed more details of the industry dynamics that had led to the higher prices.

“We are still investigating because we don’t have a full, detailed explanation,” she said, particularly on whether the fare rises were a long-term trend.

Brussels is concerned that high air fares could affect the EU’s outer regions, such as islands or isolated territories that rely on aviation for connections with the rest of the bloc.

“We cannot go as a regulator into micromanagement of prices or imposing that, I don’t think this is doable or desirable,” Vălean said. “On the other hand, what I as a regulator worry [about] is that a price [could] become a barrier for connectivity.

“We are in a permanent conversation with the industry . . . to understand what the cause of this development is.”

Vălean’s intervention adds to political pressure on airlines over rising fares.

The Italian government has proposed capping prices on routes to some islands, although it partially backtracked in September and instead gave the country’s competition authority new powers to police ticket prices.

Airlines are free to set their own fares under EU laws, and the liberalised air market has historically driven down prices and opened up new routes.

However a surge in demand for flights has this year, amid a shortage of aircraft, drove up ticket prices. Many airlines retired planes during the coronavirus pandemic, while supply chain problems hit deliveries and inflationary pressures across fuel and labour also pushed up costs.

While ultra low-cost carriers Ryanair and Wizz Air are flying more than in 2019, most European airlines are not.

Airlines including British Airways owner IAG, Air France-KLM and Lufthansa still reported record profits over the summer, helped by rising fares, partly repairing the damage to their balance sheets during the pandemic. The global industry has more than doubled its profit forecast for the year, according to the sector’s trade body, as a result of surging post-pandemic demand for travel.

Vălean said she feared higher prices would continue because of the imbalance between demand for travel and tight supply of new aircraft.

“We do expect that capacity is not going to grow at the same level as the demand.”

Airlines also face paying a higher price to pollute after member states and the European parliament last December agreed rules that will speed up the phaseout of free carbon credits given to airlines under the bloc’s emissions trading system and require the industry to report on non-CO₂ emissions too.

Airline bosses have said they broadly support the EU’s ambitious climate targets, but insisted that they need more support if they are to cut emissions, particularly in the development of sustainable aviation fuels.

IAG, Lufthansa, Air France-KLM, easyJet and Ryanair have been contacted for comment.

Region dominates continued rise in global spending by subscribers but industry faces pricing challenges

North America is set to maintain its grip over music spending in the coming years, as subscription models grow in popularity to account for more than 60 per cent of global consumer revenues by 2027, according to forecasts from consultancy Omdia.

Paid subscriptions to streaming services such as Spotify have revived the music industry over the past several years, restoring revenue that had been lost to online piracy at the turn of the millennium.

Subscriptions are set to make up more than 62 per cent of all global recorded music revenue by 2027, up from 58 per cent in 2022, Omdia analysts predict. Physical formats, such as CDs and vinyl albums, will recede to 13 per cent of revenue in 2027, from nearly 17 per cent in 2022, Omdia says.

Even as streaming services have expanded to many countries around the globe, Omdia expects North America to remain the bedrock of music spending by a wide margin.

The region will account for 43.2 per cent of global recorded music buying in 2027, down only slightly from 43.9 per cent in 2022, Omdia analysts forecast. Europe will maintain its number two spot, with 27 per cent of global music spending, the consultancy adds.

Spotify launched a decade and a half ago, and hundreds of millions of people across the world now pay a monthly fee to stream music. The streaming pioneer reached 226mn paying subscribers at the end of September.

But the early land-grab of new subscribers is slowing in some regions, leaving the music industry to find ways to keep up momentum and fuel future growth. “The days of high double-digit growth are long gone”, Omdia warns. “Developed countries all face the problem of what to do when the subscriber pool dries up”.

In the US, this slowdown has already begun. Last year, US recorded music revenue rose 6 per cent compared with the prior year, to $15.9bn, according to the Recording Industry Association of America, the trade group. This was its slowest growth rate since 2016, when the business had just begun to bounce back from its piracy-driven downturn.

In the next phase of music streaming’s evolution, Omdia analysts suggest that streaming companies will need to strike a balance with pricing.

Investment bank TD Cowen notes that the amount consumers spend on music relative to their other expenses is less than half of the level it reached during the 1990s. “Not only is music still relatively inexpensive; the product has also improved significantly, with streaming services offering access to a library of virtually all music ever created on easily portable devices”, says analyst Doug Creutz. Against this backdrop, he expects further price rises in the coming years.

Goldman Sachs analysts believe that the monetisation of music has “significantly lagged consumption” and also expect price rises “on a regular basis, especially in an environment of higher inflation”.

When Spotify launched in 2008, “the environment for recorded music sales was completely different”, says Simon Dyson, Omdia analyst. “Piracy was still horrendous. There was still lots of free music floating around. The $9.99 [price] was in line with the price of a CD.”

It would take more than a decade for Spotify to raise the price of its standard subscription in the US, the world’s largest recorded music market. The streaming group announced a $1 rise in July of this year, with Americans now paying $11 a month to stream all the world’s music. Spotify said the price rise would help the company “keep innovating in changing market conditions”. Rival Apple Music last year raised the price of its music subscription to $11 a month.

Dyson anticipates that Spotify will continue raising prices by $1 every year going forward. “It’s very underpriced for what it’s offering,” he says. “Even if they do a price rise next year and the year after, I think it will still be underpriced.”

Early financial results suggest Spotify has pricing power. During the quarter when Spotify raised prices, the group still managed to sign up 6mn new subscribers, above the 4mn it had forecast. The group also turned a profit for the first time in more than a year. Chief executive and co-founder Daniel Ek said the results proved that Spotify could become a “great business”.

“Because of our confidence in our product and our ever-expanding content offering, we felt the timing was right to raise prices”, Ek, the 40-year-old billionaire, told investors on an earnings call.

Omdia analysts believe that music companies and streaming services “need to be more proactive” in offering different pricing and subscription options. At the moment, Spotify, Apple, Amazon, YouTube and others all offer a similar catalogue of songs at similar prices. Omdia expects these services will need to differentiate themselves in the same way that Netflix and video platforms do, with exclusive content.

Spotify has made strides towards this, making a push into podcasts and audiobooks with the goal of expanding its scope to all things audio — not just music. Spotify is even offering UK and Australia subscribers 15 hours of audiobook listening per month at no extra cost, an offer that it plans to expand to the US in the coming months.

However, Omdia analysts expect streaming companies will eventually need to split some of these offerings into different subscription tiers or add-ons. “It may seem like a good idea to increase the breadth of content to limit churn, but continuing to keep all audio content in a single silo really is a recipe for disaster,” they warn.

Legislation announced in King’s Speech will allow companies to bid yearly for new licences to drill for fossil fuels

New legislation to mandate annual North Sea oil and gas licensing rounds will be at the heart of the King’s Speech on Tuesday, as Rishi Sunak looks to exploit a key policy divide with Labour ahead of the next UK general election.

The prime minister insisted the bill, which would allow companies to bid yearly for new licences to drill for fossil fuels in the North Sea, would protect jobs and strengthen Britain’s energy security by reducing its exposure to volatile international markets.

The announcement, which comes in the wake of the energy shock sparked by Russia’s invasion of Ukraine that has sent prices soaring, will allow Sunak to highlight how his “pragmatic, proportionate and realistic” approach to achieving net zero by 2050 contrasts with Labour’s policies.

The main opposition party has an average 20-point polling lead over the Conservatives ahead of the election expected next year, and has said it intends to make Britain a “clean energy superpower”.

Britain currently relies for most of its energy needs on oil and gas, which are forecast to remain part of the country’s energy mix beyond 2050.

However, the North Sea Transition Authority, the regulator, has acknowledged that any new licensing will do little to reduce Britain’s dependence on imports or affect prices of oil or gas significantly, given that the basin’s reserves are in decline and the commodities are traded on international markets.

Sir Keir Starmer has said that if his party wins power it will honour existing licences, but he has ruled out granting any new ones. Instead, the party will prioritise significant investment in nuclear and renewable energy sources.

In September, Sunak pushed back a ban on the sale of new petrol and diesel cars from 2030 to 2035 and relaxed the phaseout target for the installation of new gas boilers.

The prime minister’s latest announcement comes as he attempts to regain political momentum following damaging revelations about the UK’s response to the pandemic in the Covid-19 public inquiry, and lurid claims about unnamed Tory MPs in a new book by former culture secretary Nadine Dorries.

The King’s Speech is expected to set out new bills on crime and sentencing, leasehold reform and the creation of an independent football regulator in England.

The plans to step up oil and gas licensing, which apply to the area of the North Sea over which the UK has jurisdiction, come after the NSTA last month offered the first batch of 27 new licences as part of a round launched in October 2022.

Before then, the process had been paused since 2020 as the government reviewed the climate impact of oil and gas exploration. 

The legislation will be caveated with key net zero tests that must be met before a new round is launched each year.

Ed Miliband, Labour’s shadow energy secretary, described the bill as “a stunt which does nothing to lower bills or deliver energy security”.

“We already have regular North Sea oil and gas licensing in Britain, and it is precisely our dependence on fossil fuels that has led to the worst cost of living crisis in generations,” he added.

David Whitehouse, chief executive of Offshore Energies UK, a trade body, welcomed the prospect of a “predictable licensing process with transparent checks” each year. “The UK needs the churn of new licences to manage production decline in line with our maturing basin,” he said.

But Tessa Khan, executive director and founder of campaign group Uplift, said the government was selling a “pipe dream”, adding: “More North Sea licensing will do vanishingly little for the UK’s energy security and nothing for our unaffordable energy bills.”

Palo Alto Networks is close to acquiring Israeli startup Talon Cyber Security in a deal that could value it at $600 million to $700 million, according to two people familiar with the discussions. The deal could be announced as soon as Monday, one of the people said.

The acquisition would extend Palo Alto Networks’ acquisitions of small cybersecurity startups and add another offering to its suite of enterprise security software geared to companies with remote or hybrid workforces. Talon’s core offering is a secure web browser based on Google’s Chromium software whose features aim to prevent employees from clicking malicious links.

• Palo Alto Networks has been buying small security startups

• Deal could value Talon at between $600 million and $700 million

• Talon makes software geared toward remote workers

Palo Alto Networks, which has a $76 billion market capitalization, last week said it would acquire Israeli data security startup Dig. It paid about $400 million, according to TechCrunch.

Talon declined to comment. A spokesperson for Palo Alto Networks did not immediately respond to a request for comment.

Interest in Talon also shows companies are willing to pay a premium for cybersecurity startups. Talon was generating less than $1 million annually in revenue in 2022, The Information reported at the time. Its more recent revenue couldn’t be learned. Palo Alto Networks may be equipped to quickly monetize Talon’s product by selling it alongside its popular firewall and cloud security technology.

It also indicates that deals for Israeli startups are still getting done after the outbreak of the Oct. 7 terrorist attacks by Palestinian group Hamas. The Israeli military has since drafted hundreds of thousands of reserve soldiers, including thousands of tech startup workers, some of whom are now fighting in the Hamas-controlled Gaza Strip. In September, The Israeli outlet Calcalist reported that Palo Alto Networks was negotiating a deal to acquire Talon for $600 million.

Talon has raised $126 million from backers including Lightspeed Venture Partners and Team8. The Tel Aviv-based startup was founded in 2021 by CEO Ofer Ben-Noon and CTO Ohad Bobrov. Its software also tracks what employees are downloading as well as screenshots they have taken.

Palo Alto Networks has in recent years entered newer markets such as cloud security, where it competes with rising startups like Wiz, as well as incumbents like Netskope and Zscaler. To win in that field, Palo Alto Networks has recently relied on offering discounts on its software bundles, The Information previously reported.