Summary of Key Points
China is the world's second-largest net creditor country, with external assets exceeding liabilities by $4.07 trillion. However, it consistently experiences a deficit in investment returns—earning less from abroad than it pays to foreign entities. The reason is not that the returns on its investments are low, but rather that the cost of attracting foreign direct investment (FDI) is excessively high. This situation is unlikely to change in the short term, but can be gradually improved over the long term by optimizing the investment structure.
I. The Core Contradiction: Why Does a Net Creditor Country Not Make Money?
Normally, a country with more external assets than liabilities (a net creditor country) should earn more from abroad (through investment returns and interest) than it pays to foreign entities (creating a surplus). China is an exception:
- Among the top ten net creditor countries globally, only China and Singapore have persistent deficits; in contrast, the United States and France, which are net debtors (owing money to others), manage to achieve surpluses in investment returns.
- The key difference lies in the "interest rate differential": China's average return on foreign investments is 3.13%, but the cost of utilizing foreign capital is as high as 5.99%, resulting in a loss of 2.86 percentage points. The United States, on the other hand, has a return of 3.77% and a cost of 2.27%, resulting in a surplus of 1.5 percentage points.
- In simple terms, China pays more "interest/dividends" to foreign entities than it earns from them, leading to an overall loss.
II. Foreign Direct Investment Can Be Profitable, but Its Proportion Is Insufficient
Foreign direct investment (such as Chinese companies setting up factories or acquiring overseas businesses) involves shared risks and returns, which are generally higher than investing in foreign bonds or holding foreign exchange reserves (non-direct investments):
- In 2025, the return on China's FDI was 4.41%, 1.62 percentage points higher than the overall return on its investments (2.79%) and 2.33 percentage points higher than non-direct investments (2.08%).
- The problem is that the proportion of FDI in China's total assets is still low: only 30.4% in 2025, with the remaining nearly 70% being lower-returning non-direct investments (such as foreign exchange reserves).
- The reasons for this include the complex business environment abroad, high private investment risks, and the challenging external conditions in recent years, making it more difficult to generate profits.
III. High Costs of Attracting Foreign Direct Investment Are the Main Reason for the Deficit
Foreign direct investment is the primary method by which China utilizes foreign capital (accounting for 51.6% of its liabilities), but the costs are particularly high:
- In 2025, the cost of attracting FDI was 9.26%, 4.85 percentage points higher than the return on Chinese FDI (4.41%) and 3.35 percentage points higher than the overall cost of utilizing foreign capital (5.90%).
- The high costs are due to China's stable market and easy profit-making opportunities, which attract higher demands for returns from foreign investors. For example, when foreign companies make profits in China, they must share those profits with their home countries, increasing China's costs.
- Internationally, China's FDI costs are among the highest among emerging markets; for comparison, the United States has 2.7% and Germany has 3.18%, while China's cost is at 9.26% (only lower than Japan and Russia).
IV. This Deficit Pattern Is Difficult to Change in the Short Term, but Can Be Improved Over Time
To turn the investment return deficit into a surplus, several approaches are possible, although none are easy:
1. Increase the Proportion of Foreign Direct Investment: To achieve this, China would need to increase the proportion of FDI from 30% to over 70%, which requires more companies to invest abroad, posing significant risks and requiring a longer time.
2. Reduce the Proportion of Foreign Direct Investment: If the proportion of FDI were reduced to below 25%, costs might decrease, but it would also reduce foreign investment, which could harm economic growth.
3. Expand the Scale of Net Creditorship: At the current rate of growth, it would take 19 years for China's investment returns to cover the cost of its liabilities, and an annual surplus of $870 billion would be needed (20% higher than the 2025 peak), which is very challenging.
In summary, China's deficit in investment returns is not due to a lack of ability to invest abroad but rather to high costs associated with attracting foreign direct investment. This situation is a result of its gradual opening up to the global economy, and the benefits (such as technology transfer and job creation) outweigh the drawbacks. There is no need for excessive concern; however, long-term efforts are needed to optimize the asset-liability structure and gradually reduce the deficit.