Is China losing luster as destination of foreign direct investment?
In the long term, the huge opportunities and growth potential abounded in the Chinese market will always be the edges that the multinationals cannot give up.
There has been worries about so-called "massive withdrawal of foreign capital" from the Chinese market after China's balance of payments posted a net outflow of 11.8 billion U.S. dollars in foreign direct investment (FDI) in the third quarter last year.
The declining data, the first of its kind since relevant records began in 1998, gave China critics the firepower to argue for a decline of the country's manufacturing strength and sparked concerns among investors that the country is losing its shine as a popular destination of foreign firms.
Guan Tao, an economist with BOC International, had a different take on the figures. He said the statistics from the State Administration of Foreign Exchange cover direct equity investment and debt of related enterprises or loans to foreign shareholders of foreign-invested enterprises.
In the third quarter of 2023, debt of related enterprises turned to a net outflow of 16.8 billion U.S. dollars from a net inflow of 1.6 billion U.S. dollars in the previous quarter, leading to the decline in FDI data.
Several factors have contributed to the sharp fall in debts of related enterprises, including the tightening Fed's aggressive monetary policy and shrinking profits in foreign-funded firms.
"Obviously, the net outflow of foreign direct investment caused by the reversal of the debt transactions of enterprises should not be interpreted as a large-scale withdrawal of foreign capital," Guan said.
Zhu Bing, director of the commerce ministry's department of foreign investment administration, said that China's FDI flows are mainly hurt by the dramatic geopolitical tensions, which have forced companies to withdraw orders from China to side-step sanction risk.
Aside from the geopolitical factors, the official said many cost-sensitive multinationals chose to leave the Chinese market on the grounds of soaring Chinese workers' income and land prices. Meanwhile, some foreign firms found their products were losing competitive advantages amid the fierce market competition with local peers.
In addition, business adjustment and optimization also resulted in a shift in foreign direct investment. For example, some companies closed or cut back on the production lines of mobile phones, computers, and home appliances in China, but increased the production lines of high-tech products such as new displays and new energy batteries.
"In the long term, the huge opportunities and growth potential abounded in the Chinese market will always be the edges that the multinationals cannot give up," Zhu said, adding that China still boasts favorable conditions to attract foreign investment.
Welcomed opening-up, reform
China has been putting the opening-up high on the policy agenda from 1978 and for about four decades afterward, and its closer connection with the rest of the world has driven the growth of the country in return.
From 1991 to 2020, China's FDI inflows, industrial economy and GDP grew at an average annual rate of 15 percent, 10.4 percent, and 50 precent, respectively. Among them, China's total FDI inflows were 42 billion U.S. dollars in 2000 and 243.7 billion in 2010, an increase of 480 percent.
Nowadays, due to the current state of economic globalization, China is now the recipient of the second-largest amount of FDI from developing nations, behind the United States.
From January to November 2023, China's high-tech industries attracted investment of about 54.45 billion U.S. dollars, accounting for 37.2 percent of total foreign direct investment volume. During the period, the number of new foreign-invested firms in China increased by 36.2 percent year on year.
The expanding allure is inseparable from the solid support from the country's government. In July 2023, Chinese policymakers have vowed to "proactively raise China's opening-up to a new level" and "deepen institutional reforms" in foreign cooperation on trade, investment, finance, and innovation.
In the latest step in this regard, the State Council, or the cabinet, issued a comprehensive plan in December 2023 to promote the high-level institutional opening-up of the China (Shanghai) Pilot Free Trade Zone (FTZ), a trailblazer of the country's FTZ construction.
The plan contains a total of 80 measures covering seven areas, including initiatives to facilitate trade in goods and services, promote digital trade and enhance intellectual property rights protection, among others.
A bright note that warrants mention is that half of the aforementioned measures are related to "behind-the-border" rules, reflecting the country's resolve to comply with the evolving high-standard international economic and trade rules which are expanding from "border" rules, such as tariffs and non-tariff barriers, to more extensive "behind-the-border" ones.
These rules involve promoting the reform of the government procurement system, deepening the reform of state-owned enterprises, strengthening the protection of workers' rights, and implementing high-level environmental protection measures.
In addition, China has made consistent efforts to promote the opening-up, including creating a top-notch business environment and easing market access by shortening the negative list for foreign investment, to allow companies to focus on developing businesses in the Chinese market.
Expanding institutional opening-up serves as a reassurance for foreign investors, as the country focuses on further easing market access as well as ensuring fair treatment and competition, said Zhao Yugang, an official with the Shanghai Pilot FTZ management committee.
New strength
Amid the uncertainties brought by the rising tide of deglobalization and protectionism, China remains the world's largest trading nation around the world. It is estimated to contribute around one-third of the total global growth and remain the biggest engine of global economic development in 2023.
Known as the "world's manufacturing hub," China owns the world's most comprehensive industrial categories and a well-rounded industrial system, making it a prime option with shorter, simpler, and more transparent supply chains compared with the lengthening chains in other Asian countries.
The emergence of new strengths, such as service trade, digital trade, and cross-border e-commerce, also reordered China's trade relations with the other parts of the world. Exports of China's new tech-intensive green trio, namely solar batteries, lithium-ion batteries and electric vehicles, surged 29.9 percent to 1.06 trillion yuan in 2023. It marks the first time that the figure topped the one-trillion-yuan mark.
"The rapid increase in export volume of such products has driven a swift rise in their international market share," Zhang Wei, vice president of the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce.
Zhang takes the boom of China's electric vehicles an instance. Driven by strong exports, China's electric vehicles' international market share has increased by about 20 percentage points in five years, expanding its global presence.
Nevertheless, the evolving FDI data did sound an alarm about the grim global economy China is facing today. Some developed economies have continued to impose differential discrimination against China in the name of "de-risking" or "friend-shoring," which destabilizes the global industrial supply chains and causes more uncertainties.