Lasting Attraction

High-level opening up and policies to attract foreign direct investment (FDI) were hot topics during the annual sessions of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC) National Committee, China’s key annual political meetings commonly known as Two Sessions.

China has been one of the most popular FDI destinations over the years and has benefitted from it. However, last year, according to data from the State Administration of Foreign Exchange, China’s actual use of FDI dropped by 8 percent year on year, which triggered concerns about foreign capital outflows and China’s position in the global supply chain.

How to objectively view the fluctuations in the scale of foreign investment? Does the Chinese market still have its advantages in attracting foreign investment? How to demonstrate China’s firm and open attitude and stabilise foreign investment confidence? Chinese experts say China is still full of opportunities for foreign investors, and that the country should continue to expand its opening up.

Is foreign capital leaving? 

According to Zhou Hanmin, a member of the Standing Committee of the CPPCC National Committee and legal expert from Shanghai, since China adopted the reform and opening-up policy in 1979, the country has continuously promoted the development of foreign trade and has been moving closer to international rules and adopting international practices. 

Though FDI in China, in terms of actual use, fell 8 percent year on year to 1.13 trillion yuan ($157.07 billion) in 2023, “Yet, it stood at a historically high level,” Zhou told ChinAfrica. Data from the Ministry of Commerce shows it is still the third-highest level in history. 

Meanwhile, globally, cross-border investment continues to be sluggish. According to data from the United Nations Conference on Trade and Development (UNCTAD), the scale of global cross-border direct investment is expected to have dropped by 18 percent year on year in 2023. However, last year, China still ranked second in the world in attracting foreign investment and ranked first among developing countries. 

Also, according to the latest Global Investment Trends Monitor released by UNCTAD, the overall momentum of global FDI in 2023 was weak. Although China reported a rare decline in FDI inflows, it should be noted that in the US, the largest FDI recipient, FDI inflows in 2023 were down by 3 percent, and ASEAN, normally an engine of FDI growth, reported a 16 percent decline. FDI flows to developing countries overall fell by 9 percent. Excluding Luxembourg and the Netherlands, inflows to the rest of the EU countries were 23 percent down. 

As for the “massive withdrawal of foreign capital from China” claims of Western media, Lu Shaye, a member of the 14th CPPCC National Committee and China’s ambassador to France, said, “It is wrong to conclude that foreign capital has been withdrawn based solely on the decline in FDI.” 

Why did FDI decline?

The decline in China’s FDI is affected by multiple factors at home and abroad.

First, according to Zhou, FDI was affected by the COVID-19 pandemic. The impact of the global pandemic has not subsided. The pandemic has disrupted offline inspections and exchanges and affected the investment decisions of multinational companies.

Second, geopolitical risks have increased significantly, affecting the enthusiasm of foreign investors. “Some foreign capital has left China as a last resort,” Zhou said, using the example of the US, which uses “long-arm jurisdiction” to impose extraterritorial sanctions on some foreign companies that cooperate with China, resulting in certain fluctuations in cross-border capital flows. 

At the same time, competition among countries to attract investment is becoming increasingly fierce, and the complexity, severity, and uncertainty of the external environment are increasing, which poses certain challenges to China in attracting foreign investment.

Third, the conflict between Russia and Ukraine has exacerbated the already fragile global supply chain. Companies have begun to adjust their global layout and are seeking backups for the industrial chain to avoid the potential risks of over-reliance on a single supplier. 

Lu believes that now China is not only a “market” but also a “competition terrain” for both Chinese and foreign brands. “Chinese companies now have talent and technological advantages. In a highly competitive market like China, foreign companies now need to be prepared for more competition. If they try to avoid competition, they will be doomed to fail,” Lu told ChinAfrica. In recent years, in many fields such as household appliances, communication equipment, and construction machinery, there have been cases of foreign companies withdrawing from the Chinese market due to competitive pressure. Faced with fierce market competition, some companies have become more cautious in making investments due to the risk factors. 

Finally, it should be noted that as China undertakes industrial upgrades, investment in labour-intensive industries decreases. As the domestic economy becomes more developed, labour costs rise, low-cost advantages weaken, and some labour-intensive industries undergo gradient shifts due to changes in comparative advantages.

How to stabilise foreign investment?

Bai Ming, a researcher at the Beijing-based Chinese Academy of International Trade and Economic Cooperation, believed that stabilising foreign investment means actively attracting new investments as the existing stock of foreign investment declines. He added that the business environment should continue to be improved, listing five components of good business environment: political stability and integrity, dynamic and orderly economy, inclusive and unique culture, social fairness and justice, and sound legal system that keeps pace with the times.

“China should create a fairer, more convenient and predictable foreign investment environment, respect and comply with international practices in terms of market access, commercial registration, business operations, social services, etc., further enhance the level of trade and investment facilitation, and strengthen international commercial laws and the protection of the legitimate rights and interests of market entities,” Zhou said.

China will ramp up efforts to attract foreign investment, including further shortening the “negative list” for foreign investment, and all market access restrictions on foreign investment in manufacturing will be abolished, according to the government work report delivered by Chinese Premier Li Qiang to the annual session of the NPC, which also gives foreign investors a reassurance.

“We are very encouraged by China’s determination and intensity to continue to expand its opening up. This openness provides enterprises with more business opportunities, especially in terms of enhancing enterprise cooperation, technological exchanges and market access,” Wang Ruijia, head of Strategic Business Development for Asia at Sasol, a global integrated chemicals and energy company originated from South Africa that has invested in China since 1992, told ChinAfrica. He said that China’s further opening up means the company can expect a more transparent and standardised business environment, which will help it to better showcase its innovative technologies and high-quality products.

High returns on investment 

Capital pursues profit. Lu said that an important attraction of the Chinese market for foreign investment is higher yield.

“I noticed that French companies are still very optimistic about the Chinese market because they can still make money by investing in China,” Lu said.

According to calculations by the State Administration of Foreign Exchange, in the past five years, the rate of return on FDI in China was 9.1 percent, much higher than the 3 percent in the US and European countries, and also higher than the 4 to 8 percent in other emerging economies.

Lu said that for the Chinese market, despite the pessimism of Western media, a group of multinational companies with strategic vision have not withdrawn, but have in fact increased investment in China.

In 2023, a total of 53,766 foreign-invested enterprises were established, up 39.7 percent year on year. In January this year, 4,588 new foreign-invested enterprises were established, a year-on-year increase of 74.4 percent. “It can be seen from this that most multinational companies are optimistic about the long-term development prospects of the Chinese market and are still confident in investing in China,” Lu said.

In addition, last year, China’s FDI from countries along the Belt and Road saw an increase, according to the Ministry of Commerce. “This is unprecedented. Many people think it’s only China that has investment in the Belt and Road countries [and not the other way round],” Zhou told ChinAfrica. 

According to a survey released by the China Council for the Promotion of International Trade, on 30 January, more than 80 percent of foreign-funded companies in China are satisfied with the country’s business environment, and almost 70 percent expressed optimism regarding market prospects in the next five years.

The above data indicate the world’s second-largest economy remains a popular destination for global investors.