China’s foreign economy has been under significant pressure due to changes in the external environment. Despite rapid growth in foreign exports during the COVID-19 pandemic, there has been a gradual decline in foreign direct investment (FDI) since June, which only turned positive in November. This has led to a weaker contribution of foreign trade and overseas investment to China’s economy.
The Ministry of Commerce did not publish the relevant data as scheduled, but from January to October 2023, the number of newly established foreign-invested enterprises nationwide increased by 32.1% year-on-year to 41,947, while the actual use of foreign capital amounted to RMB 987.01 billion, a 9.4% decrease. This situation signals that the external impact is weakening the contribution and participation of foreign trade and overseas investment to China’s economy regarding investment demands.
The recent fluctuations in foreign investment data are multifaceted, influenced by both economic and non-economic factors. The external environment has significantly changed, with geopolitical risks increasing, developed countries and emerging economies adopting large-scale preferential policies, intensifying international competition for investment. The COVID-19 pandemic has disrupted offline exchanges, leading multinational companies to lack an understanding of China’s actual situation, resulting in misunderstandings that affect investment decisions.
The outflow of foreign capital is normal, but the abnormality lies in the country’s Ministry of Commerce no longer publishing the relevant data as scheduled. Foreign enterprises account for less than 3% of the total number of enterprises in China, but they contribute to 2/5 of China’s foreign trade, 1/6 of tax revenue, and nearly 1/10 of urban employment. Researchers at have emphasized that the current trend of foreign capital outflow poses a risk to China’s economy if it continues.
Despite the U.S.-China trade war in 2018 and geopolitical competition, China’s utilization of Foreign Direct Investment (FDI) has increased over the past three years, reaching USD 189.13 billion in 2022. However, this year has seen a noticeable outflow trend, suggesting that internal changes within China are the main reason for the decline in FDI. Researchers at have noted that the market signals reflected in the net outflow of foreign capital need sufficient attention, prompting a reassessment and reflection on the current changes in the Chinese market environment.
China’s economic and market factors are also primary considerations for foreign investment decisions. Goldman Sachs noted China’s slowing economy and the real estate sector’s impact on the Chinese economy. Changes in domestic and international economic policies, the withdrawal of foreign investments, job market tension, and financial pressure on local governments further exacerbate uncertainty.
Tao Wang, Managing Director and Head of Asia Economic Research at UBS investment bank, stated that the net FDI in the third quarter was negative USD 11.8 billion, an unprecedented occurrence. The decline in FDI is due to structural, cyclical, and short-term factors. The pandemic has impacted China’s industrial enterprises’ profits, leading to a decrease in reinvestment of retained profits. Additionally, strict regulations and U.S. restrictions on technology investments in China have led to a greater decrease in private equity investments in the technology sector. The U.S. interest rate hike has also led to a sharp increase in financing costs, impacting the data on FDI.
The global industrial chain restructuring and the upgrading of the Chinese economy continue, foreign investment in China is expected to shift. As the domestic market expands and demand increases, market-driven foreign investment will continue to enter the Chinese market. China needs to adjust its policies to gain trust and instill confidence in foreign enterprises. The Central Economic Work Conference has proposed stabilizing the foundation of foreign trade to accelerate the cultivation of new foreign trade momentum.
Despite the Chinese government’s emphasis on attracting foreign investment, the market environment has changed. Some regions are replacing old with new, focusing on high-tech companies and treating foreign enterprises differently in the traditional manufacturing sector. This has led some foreign enterprises to consider leaving. Additionally, the Chinese government and enterprises are overly focused on factors such as self-reliance and controllability, creating non-market barriers for foreign-funded enterprises, making it difficult for them to access the Chinese market.
Government policies are increasingly important in promoting high-quality development, with macroeconomic regulation and micro-level control strengthening through precision regulation. This has led to significant changes in the Chinese market’s ecology and functionality, impacting foreign investors and private enterprises. To attract foreign investment and build a healthy market environment, emphasizes adhering to the original intention of a market economy.
