Current Conditions and Historical Trends of Foreign Investment in China

1.    Foreign Investment in China

Foreign investment, in the form of capital and technology transfers, has been playing a significant part in China’s social and economic development. Inflows of foreign investment have relieved the shortage of capital in the initial phase of reform and opening up in the country. The entry of foreign capital helps create jobs, improve capacities for business operations and technological innovation, and spur healthy market competition. In addition to these positive social effects, it contributes greatly to China’s trade growth and to optimizing its overall export structure. As another form of foreign investment flows, the promotion and localization of internationally advanced technologies and equipment in China is a vital driver in improving and upgrading the industrial structure of China.

After years of rapid economic growth, China has become a preferred destination for foreign investment. It has topped developing countries in inward foreign investment for 25 consecutive years. According to the statistics from MOFCOM, during 2018, 60,553 foreign-invested companies were newly established across the country, marking a YOY increase of 69.8%, with the amount of foreign capital actually utilized up by 0.9% to RMB 885.61 billion, or by 3% to USD 134.97 billion (excluding investment in banking, securities and insurance).

2.    Sources of FDI in China

China has seen an increase in the diversity of FDI sources. In the first half of 2018, 746 companies were established by ASEAN investors, up 21.7% YOY, with actual investment totaling USD 3.46 billion, up 29.8%; 1,099 companies by investors from 28 EU members, up 16.5% YOY, with a total actual investment of USD 4.34 billion, 13.3% lower YOY; and 1,921 companies by investors from countries along the Belt and Road, down 3% YOY, with actual investment up by 30.3% to USD 3.6 billion. Among these newly established companies, 6,653 are in the Yangtze River Economic Belt region, 7.5% up from last year, with the amount of foreign capital actually utilized totaling USD 32.41 billion, a YOY increase of 8.1%.

Over 90% of China’s total FDI was from the top 10 source economies, with Asian economies being the major contributors. Investment flows from Europe and USA grew sharply. In the first half of 2018, actual investment from Singapore, South Korea, Japan, USA and UK increased rapidly at a YOY rate of 33.9%, 66.9%, 5.1%, 16.3% and 56.9% respectively. Meanwhile, the total amount of actual investment from the top 10 source economies as listed below rose by 4.5% over the previous year to USD 65.28 billion, contributing to 95.5% of the foreign investment actually utilized in China.

Top 10 Sources of Foreign Investment in China in the First Half of 2018

Source: MOFCOM

3.    Historical Trends of Foreign Investment in China (2008–2018)

Generally, China continues to offer a favorable environment for foreign investors. From 2008 to 2017, foreign investment actually utilized in China maintained a steady growth in a changing global economic climate. During such period, fluctuations in FDI were affected by international financial instability, Chinese economic growth slowdown, and overcapacity in the world’s markets. The 2008 financial crisis struck a heavy blow to foreign investment flows into China, followed by a 3.62% drop in 2009. In 2012, the global economy was still struggling in the aftermath of the financial crisis, and the macroeconomic policy responses of many countries failed. This year saw a 3.74% decrease in the foreign investment actually utilized in China. After the 2008 crisis, China began to attach greater importance to the actual use of foreign investment, while focusing on a rapid economic growth. Between 2013 and 2014, the increase in overall utilization of foreign capital slowed down, effectively reducing the adverse economic effects of excessive growth.

In 2016, with the global economy undergoing a post-crisis structural transformation, outward FDI by multinational companies from developed economies, particularly European countries and the USA, decreased. This led to a slight YOY drop in the amount of foreign investment actually utilized in China. In 2017, despite the declining cross-border investment in the world, fueled by the soaring investment from Hong Kong to the mainland, China’s actual FDI disbursement rose to USD 136.3 billion, the second highest after the USA.

In recent years, China has constantly raised the level of its openness and achieved market diversity and balance through efforts such as gradually loosening its restriction on foreign investors into the markets of telecommunications, medical services, education, elderly care and new energy resources, and increasing parity of treatment between domestic and foreign banks. Meanwhile, business registration procedures for foreign-invested companies have been simplified to a more efficient one-stop process.

According to the Circular on Measures for Actively and Effectively Utilizing Foreign Investment to Promote Quality Economic Development issued by the State Council in May 2018, China will create a more attractive business environment with a focus on providing broader and more convenient market access and protection for foreign investment, optimizing regional opening up arrangements, and encouraging innovations in national-level development zones. A series of favorable measures have been in place, such as the launch of the latest negative list and loosened administrative controls in pilot free trade zones, strengthening the confidence of foreign investors. Companies from Europe, the USA and Japan have remained optimistic about their future growth in China, and are planning to increase investment. As estimated by a report of the United Nations Conference on Trade and Development, the foreign investment in China will continue to record a growth in 2018.