Website banner (7).png

Despite FDI growth in China, foreign investors remain cautious and consider other options

The Chinese Ministry of Commerce recently published the latest figures on foreign direct investment (FDI). According to the authorities, FDI rose 15.6% from a year earlier in the first nine months of the year to 1 trillion yuan ($138.52 billion) after a 16.4% growth in January-August.


Though the numbers may look promising, many foreign companies operating in the country are considering shifting investments to other markets as they struggle under Beijing’s COVID zero policies and the growing geopolitical tension between China and the West.


As part of getting the economy back on track, China’s National Development and Reform Commission (NRDC), the country’s top economic planner, announced that it is exploring new ways of attracting more foreign direct investment (FDI) into China’s manufacturing, service, and green economy sectors.


The NRDC also promised to improve supply chains and address foreign investor concerns by enhancing intellectual property protection, reducing market access restrictions, and improving the rule of law to ensure foreign investors “have a fair shot in China.”


However, these steps may not be enough to counteract the impact from geopolitical uncertainty or COVID restrictions.


A recent report by the Rhodium Group examining FDI in China over the past decade revealed that European investments have grown much more concentrated, both in terms of the companies that are investing there, the countries they come from and the sectors in which they operate.


While a handful of large corporations continue to pour money into their Chinese operations, many other firms with a presence in the country are withholding new investment, widening the gap in how European firms perceive the balance of risks and opportunities in the Chinese market.


Foreign businesses have complained in the past about unequal access to the Chinese market versus their peers, lack of intellectual property protection and forced technology transfers. The U.S. tried to address those issues with tariffs and sanctions.


Chinese officials announced that the government would encourage foreign investment in advanced manufacturing, higher-quality services, high-tech, energy conservation and environmental protection. Specific support for investments in the less developed central, western, and northeastern parts of China will be offered, they added.


Analysts have pointed the absence of three types of investors: investors in the services sector, fewer European companies looking to acquire Chinese businesses and the absence of new entrants to the market.


Media reports informed that China-focused hedge funds saw some of the highest net outflows in 2022, although analysts estimate that investors still want exposure to the Chinese market due to its strong growth potential.


While the EU Chamber of Commerce published a new report expressing concerns of European businesses and calling for more reforms to improve the market opportunities, Chinese officials informed that they plan to roll out measures to encourage more FDI and offer more favorable conditions for foreign investors and businesses.


The fastest growth rate of FDI originated from South Korea, up 58.9 percent from the same period the previous year. This was followed by Germany (30.3 percent year-on-year), Japan (26.8 percent year-on-year), and the UK (17.2 percent year-on-year). Meanwhile, the regions with the highest growth rate of utilized foreign capital were western China, growing 43 percent year-on-year, followed by central China (27.6 percent year-on-year), and eastern China (14.3 percent year-on-year).


The fastest growth of 2022 happened in January and February, with utilized FDI growing 45.2 percent year-on-year in February. This was before the spread of the Omicron variant of COVID-19, which led to stricter control measures imposed in cities across China.


The impact of lockdowns caused a slump in April and May, while the spike in June – which recorded US$24.6 billion in FDI, above just US$13.3 billion in May – is a likely result of businesses returning to normal operations following the lifting of restrictions.


July saw the smallest amount in the year, with FDI reaching just US$11.6 billion. August appears to show improving figures – up to US$14.5 billion – but it may be too soon to say whether this trend will continue.


Hedge funds with a focus on the Greater China region experienced the highest net outflows in 2022 since the index began recording the data 15 years ago. Reuters informed that net outflows reached US$3.6 billion in the first seven months of 2022, as hedge funds sought to reduce their exposure to China.


Meanwhile the average returns on investments in the first eight months of 2022 reached -11.54 percent.


This is a significant downturn compared to US$1.8 billion net inflows recorded in 2021, and US$8.7 billion in net inflows in 2020. According to analysts cited by Reuters, investors are still keen on maintaining exposure to the China market as the country remains a prominent growth market.


The war in Ukraine, the COVID pandemic and the trade tensions with the US may be blamed for this year’s net outflows. Looking forward, some of these factors may recede, as new policy from the Chinese government shades light to uncertainties and eases investors’ concerns.


According to Rhodium Group, in the period from 2018 to 2020, over 80 percent of European FDI came from just 10 investors, although this proportion dropped to 71 percent in 2021.


From 2018 to 2021, almost 70 percent of FDI from Europe went to just five sectors – autos, food processing, pharmaceuticals and biotech, chemicals, and consumer products manufacturing. Of this, 31 percent went to automotive equipment and components.


In the same period, only four European countries – Germany, the UK, France, and the Netherlands – accounted for 87 percent of total FDI on average. Of this, four German firms – Volkswagen, BMW and Daimler, and BASF – accounted for 34 percent of the total European FDI.


The economic slowdown has motivated Chinese authorities to implement measures to encourage spending and investment and get the economy back on track. This includes facilitating foreign investment.


In the past months, Chinese authorities have called for policies and measures to boost foreign investment, including strengthening the guarantee of essential factors (such as energy, oil, gas, and transport) and promoting the implementation of several key foreign-funded projects as soon as possible.


The government also wants to further facilitate the entry and exit of foreign business, technical personnel, and their families, as well as consolidate the responsibilities of major foreign trade and investment provinces to better play a leading role and require relevant departments to improve coordination and services.


International business professionals remain skeptic on whether these steps will be enough in the future to overcome the geopolitical and health obstacles. The Chinese government would have to reinforce its commitment to relax its COVID prevention rules (specially quarantine periods) and support businesses in case of further lockdowns in order to stimulate new and consistent FDI.


To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at kristina@woodburnglobal.com.


DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.

JOIN OUR MAILING LIST