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Foreign direct investment (FDI) in China

FDI in Figures

Global foreign direct investment (FDI) flows in the first half of 2021 reached an estimated USD 852 billion, showing stronger than expected rebound momentum, with an increase of 78% of the partial-year growth rate on the previous year according to UNCTAD’s Investment Trends Monitor released on October 2021. The global FDI outlook for the full year 2021 has also improved from earlier projections. The current momentum and the growth of international project finance are likely to bring FDI flows back beyond pre-pandemic levels. Nevertheless, the duration of the health crisis and the pace of vaccinations, especially in developing countries, as well as the speed of implementation of infrastructure investment stimulus, remain important factors of uncertainty. Other important risk factors, including labour and supply chain bottlenecks, energy prices and inflationary pressures, will also affect final year results. (UNCTAD, October 2021). Covid’s impact on developing markets and shifting investment from China are major trends that will impact foreign investment in 2022.

According to the 2021 World Investment Report published by UNCTAD, FDI inflows into China actually increased by 6% in 2020, to USD 149 billion, up from USD 141 billion in 2019. This was also the result of successful pandemic containment measures and rapid recovery. The stock of FDI in 2020 reached USD 1 918 billion, an exponential growth when compared to 2010 when the stock was USD 587 billion. The faster return to positive GDP growth in the second quarter of 2020 and the lifting of investment restrictions helped support investment. The service sector led growth, accounting for more than 70% of inflows; FDI accelerated especially in technology-related industries. With the aim of boosting investment, the government expanded the number of industries open to FDI, lifted restrictions on foreign investment in key industries and amended the negative list for foreign investment in pilot free trade zones, which increased by 11%. M&A sales increased by 97 % (to USD 19 billion), mainly in the ICT and pharmaceutical industries. The value of new greenfield investments announced in 2020 contracted substantially in sectors such as transport and automotive. In 2020, China was ranked the world's second largest FDI recipient after the United States. The country is the largest recipient in Asia and the leading investing country in terms of FDI outflows. China's main investors have remained broadly stable. Inflows from the US and Europe have dropped, but regional investment has continued to increase as flows from ASEAN countries grow. Singapore, the Virgin Islands, South Korea, the Cayman Islands, Japan, Germany and the United States count among major investors. Investments are mainly oriented towards manufacturing, real estate, leasing business and services, computer services, wholesale and retail trade, financial intermediation, scientific research, transport, energy, and construction.

China was ranked 31st out of 190 countries in the the last World Bank's 2020 Doing Business report, a major improvement from 2019, when it was ranked 46th out of 190. China was one of the top 10 economies to improve the most between the 2019 and the 2020 reports. This progress reflects improvement in a wide array of subcomponents ranging from procedures for starting a business to measures to improve electricity access and get construction permits. The country demonstrated reform agendas that aim to improve the business regulatory environment in the country over the course of several years. The reforms mainly focus on increasing the efficiency of business processes, such as tax cuts, trade with tariff cuts, and reduced barriers to foreign investors. In order to attract further foreign investment, the country has introduced mechanisms to improve the delivery of major foreign investment projects, reduce import tariffs, streamline customs clearance, and establish an online filing system to regulate FDI. With a wealth of employees and potential partners eager to learn and evolve, the country is a base for low cost production, which makes it an attractive market for investors. Nevertheless, certain factors can hinder investments, such as China’s lack of transparency, legal uncertainty, low level of protection of intellectual property rights, corruption or protectionist measures which favour local businesses. FDI inflows to the high-tech sector have been rising significantly and currently account for almost a third of total inflows.

As China continues to lead the global recovery from the adverse economic effects of the COVID-19 pandemic, foreign multinationals are doubling down on their investments in China, establishing thousands of new firms and expanding existing ones. Despite economic and financial tensions and a series of foreign restrictions on the transfer of technology to China, China continues to attract record amounts both of foreign direct investment and inflows of portfolio investment into listed onshore Chinese equities and Chinese government bonds (PIIE, 2020). Total foreign investment in China for 2021 is likely to surge by double digits from a year earlier if current trends continue (China Ministry of Commerce, November 2021).

The latest United Nation Asia-Pacific Trade and Investment Trends Report provides additional information on FDI in China and Asia-Pacific in 2021 and 2022.

 
Foreign Direct Investment 201920202021
FDI Inward Flow (million USD) 141,225149,342180,957
FDI Stock (million USD) 1,769,4861,918,8282,064,018
Number of Greenfield Investments* 835412481
Value of Greenfield Investments (million USD) 61,99931,94831,500

Source: UNCTAD, Latest available data

Note: * Greenfield Investments are a form of Foreign Direct Investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up.

 
Country Comparison For the Protection of Investors China East Asia & Pacific United States Germany
Index of Transaction Transparency* 10.0 5.9 7.0 5.0
Index of Manager’s Responsibility** 4.0 5.2 9.0 5.0
Index of Shareholders’ Power*** 5.0 6.7 9.0 5.0

Source: Doing Business, Latest available data

Note: *The Greater the Index, the More Transparent the Conditions of Transactions. **The Greater the Index, the More the Manager is Personally Responsible. *** The Greater the Index, the Easier it Will Be For Shareholders to Take Legal Action.

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What to consider if you invest in China

Strong Points

Strong points for FDI in China include:

  • The largest internal market in the world, with 1.44 billion potential customers
  • Sovereign risk contained as public debt remains mainly domestic and denominated in local currency
  • Importance of foreign currency reserves and public debt owned by Chinese government and individuals
  • A well-developed production sector (manufacturing sector and heavy industry)
  • A favourable geographic location (close to emerging Asian markets, to Japan, maritime frontage)
  • Top economy in terms of purchasing power parity (PPP) thanks to rapid growth of the economy
  • Labour costs remain comparatively low, although the situation is changing in certain areas
  • New opportunities with the development of the western provinces (particularly Sichuan province)
  • Development of a new export network (Silk Road network)
Weak Points

Some of the disadvantages for FDI in China include:

  • An ever-changing legal environment
  • Bureaucratic and administrative complexities
  • A lack of transparency and weak intellectual property rights protection
  • Ageing population
  • High level of corporate indebtedness
  • Production overcapacity in several sectors
  • A strongly degraded environmental situation in several big cities
  • Cultural differences in business practices that may be difficult for foreigners to learn and apply in new business situations
  • Underdeveloped middle management and low rate of qualified workers
Government Measures to Motivate or Restrict FDI
Generally speaking, the Chinese government is more restrictive than other big economies in regard to foreign investment, with numerous sectors closed to FDI. State companies and "national flagships" are protected (discriminatory practises, non-independent judicial power, selective application of regulations). Until a few months ago, the Chinese state required forced technology transfer and its system of intellectual property protection was among the weakest in most industrialised countries.

The Chinese government encourages investment in the following industries or sectors: high technology, production of equipment or new materials, service sector, recycling, use of renewable energies and protection of the environment. In addition, the country appears to discourage foreign investment in key sectors, for which China seeks to transform domestic firms into globally competitive multinational corporations and sectors that have historically benefited from state monopolies or traditionally of State. The government also discourages investments intended to profit from speculation (money, real estate, or assets). In addition, the government plans to limit foreign investment in resource-intensive and highly polluting industries.

The Law on Foreign Investments of the People's Republic of China, adopted at the second session of the 13th National People's Congress on 15 March 2019, has been in force since 1 January 2020. The new Foreign Investment Law seeks to address common complaints from foreign businesses and governments. The Law specifically prohibits the government and government officials from forcing transfer of technology, while technology cooperation on the basis of free will and business rules is encouraged by the state. Indeed, article 22 stats that the State shall protect the intellectual property rights of foreign investors and foreign-funded enterprises. The law also gives the possibility to foreign investors to receive the same treatment when they apply for licences (article 30) and participate in public procurement (article 16). The competent departments for commerce (Ministry of Commerce) and for investment (National Development and Reform Commission) are delegated major responsibility to promote, protect and manage foreign investment.

On June 23, 2020, the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOF) jointly issued two "negative lists" (on Foreign Investment and Free Trade Zone Special Administrative Measures) and a draft edition of the Catalogue of Encouraged Industries for Foreign Investment. Compared with the 2019 edition (full list in Chinese available here), the proposed 2020 Foreign Investment encouraged catalogue has been further lengthened, with 125 new industries added and 76 previously listed industries amended. There are no major changes compared to the 2019 catalogue; it welcomes more FDI in the following three main areas of China: high-end production; production-oriented service industries; China’s central, western, and northeastern provinces.

Bilateral investment conventions signed by China
China has signed bilateral agreements for investments with several countries. To see the list of the countries, consult UNCTAD website.

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Latest Update: November 2022

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