What's happening to foreign direct investment in China

In 2023, investment in China by overseas-based companies fell to its lowest level in 30 years.
Specifically, foreign direct investment (FDI) beyond the Wall, an indicator of the flow of foreign capital into the country, reached the figure of around $33 billion, according to data released by the State Administration of Foreign Exchange.
This was an 82% decline from the previous year and the lowest annual figure since 1993.
The value was positive because new investments exceeded outflows.
But FDI fell for the second consecutive year and is less than 10% of the peak of $344 billion marked in 2021.
China had worked hard to attract investment, personnel and technologies from abroad under the infamous policy of « reform and opening up" led by Deng Xiaoping starting from the late 1970s.
Today, however, the situation is very different.
Amid global geopolitical tensions, many foreign companies have scaled back their Chinese operations after the Xi Jinping-led government chose to focus on protecting national security in an effort to crack down on espionage.
The authorities have also tightened their grip on research firms that conduct market analyzes and other activities, and cases of detention of workers from foreign companies have been reported.
Then there is the slowdown in the world's second largest economy, which is still struggling to fully recover from the consequences of the pandemic, while many investors are chasing higher returns elsewhere.
What's happening in China In the first Chinese Cabinet meeting after the Lunar New Year holidays, meanwhile, Premier Li Qiang urged officials to work on "building confidence" and to "focus on resolving practical issues that worry the masses and businesses ,” according to a statement released by state news agency Xinhua.
Meanwhile, FDI has declined amid geopolitical uncertainty.
Beijing has also turned the spotlight on some foreign consultancies over the past year, fearing that international firms sharing sensitive information with their clients could pose a threat to national security.
Financial Times calculations based on Chinese Ministry of Commerce data compiled by Wind show foreign direct investment fell 34% to Rmb72.8 billion ($10 billion) year-on-year in September, the steepest decline large since 2014.
The aforementioned data from the Ministry of Commerce also represent a narrower gap compared to the SAFE measure, which only covers new incoming investments.
The latest SAFE (State Administration of Foreign Exchange) reading offered some reasons for optimism.
In the fourth quarter of 2023, $17.4 billion was invested; this followed a deficit, its first ever, in the third quarter.
As if that wasn't enough, according to a report by the German Economic Institute, direct investments in China by German companies reached a record $13 billion last year.
We can therefore say that a drastic restructuring of the FDI mosaic is underway in the People's Republic of China.
The behavior of foreign companies Automakers have been forced to change scenery as Chinese players have become more competitive.
With the United States limiting China's access to advanced US-made semiconductors, chip-related companies are clearly distancing themselves from the Asian giant.
Recall that the Dragon accounted for 48% of global chip-related FDI in 2018, and that percentage has plummeted to 1% in 2022, according to the Rhodium Group.
US and European companies also often conduct in-depth research on business conditions before investing, but have had to deal with lengthy delays due to revisions to the anti-espionage law that came into force in July.
The prolonged slowdown in China's economic growth, Nikkei Asian Review highlighted, is another reason why foreign companies are refraining from investments.
Domestic demand is weak partly due to the collapse of the housing market and there are warning signs of deflation.
China's productivity improvements could slow if foreign companies continue to withdraw or scale back their operations on Chinese soil.
This, together with the shrinking workforce, could damage the economic growth of the Asian giant in the medium to long term.
Aware of these risks, Xi Jinping's government has simplified the conduct of acquisitions, including those involving foreign companies, in the hope of making the Chinese market more attractive.
We will see if this will be enough to reverse the trend described above.
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