Foreign Direct Investment in China by Sector and Region

1.           FDI in China by Sector

In recent years, China has gradually become one of the major destinations for global cross-border investors, ranked as the most promising home economy and the second most promising host economy after the US of FDI in the World Investment Prospects Survey launched by the UN. FDI in the tertiary industry has kept increasing year by year, driving the transformation and maturation of the industry structure. In addition to manufacturing, leasing and business services, as well as wholesale and retail, investors from the rest of Asia have focused on sectors of real estate and finance in China; those from North America on scientific research, technical services, geological survey, information transmission, computer science and software industries; those from the EU on finance, scientific research, technical services and geological survey; and countries and territories along the “Belt and Road” on real estate, transportation, warehousing and postal services.

·         FDI in Three Sectors

As China has been dedicated to promoting supply-side structural reforms and expanding the gateway to service sector, the proportion of actually utilized FDI in the tertiary industry increased year by year, which increased from 47.58% in 2007 to 73.56% in 2017 according to statistics, while the proportion of FDI in the secondary industry saw a gradual decline, with a decrease from 51.32% to 25.83% in the corresponding period.

From 2010 to the first half of 2018, the actually utilized FDI in agriculture, forestry, animal husbandry and fishery, and manufacturing went downward annually, while that in the service sector kept increasing, indicating a shift of foreign investment tilting towards the tertiary sector.

Source: NBS

·         Target Industries and Investment Forms of FDI

In recent years, the structure of foreign-invested industries in China has been further optimized, with the focus shifted to services, high-tech industries and advanced manufacturing. Among them, the manufacturing used foreign investments to reverse a continuous decline and has achieved a rapid growth in FDI. In 2018, the amount invested in manufacturing rose by 20.1% on year-on-year basis and accounted for 30.6% in the total investment which increased by 4.8% than last year. As for the high-tech manufacturing industry, the amount had been made increasing by 35.1% on year-on- year basis. In the increasingly diversified foreign-invested industries, the actual FDI in pharmaceutical, electronics and communication equipment, and medical device and instrument manufacturing grew rapidly, up 12.3%, 56.4% and 442.3% YOY respectively during the first half of 2018.

·         Surging FDI in Service Sector

As the world’s major economies are enhancing their global competitiveness in the service sector, the service economy, as a key of the new economic development model, has become increasingly important in modern economic structure. Against the fierce competition of world’s major economies in the service industry, China has put a high priority on the development and expansion of this sector, taking it as a pillar of the transformation and upgrading of China’s industry structure, which was evidenced by the launch of the following policies and measures.

v  Revising the Catalogue of Industries for Guiding Foreign Investment in 2016

v  Amending the Special Administrative Measures on Foreign Investment Access to Pilot Free Trade Zones (Negative List) to lift or relax restrictions on foreign investment access to more sectors in 2018

v  Releasing the Circular of the State Council of China on Several Measures Concerning the Active and Effective Use of Foreign Investment to Boost High- quality Economic Growth in June 2018

v  Promulgating the Framework Plan of China (Hainan) Pilot Free Trade Zone in September 2018 to further open up the modern services sector, which proposed a clustering-based model to accelerate the innovation-driven development of this sector

v  Signing supplemental agreement to the CEPA Agreement on Trade in Services to achieve basically free trade in services between the Mainland China, and Hong Kong and Macao

v  Issuing the Implementation Measures of Negative List Management Model for the Cross-border Service Trade in China (Shanghai) Pilot Free Trade Zone and the Special Administrative Measures on Cross-border Service Trade in China (Shanghai) Pilot Free Trade Zones (Negative List) in 2018, which marked the establishment of the negative list management model for the cross-border service trade and the opening up of the services sector in China (Shanghai) Pilot Free Trade Zone (SHFTZ)

In terms of the actual FDI in the three sectors of China, the tertiary industry has enjoyed remarkable increment. According to the statistics of MOFCOM, the number of new foreign-invested companies and the amount of actual FDI in the tertiary industry have witnessed an increase over the previous year. In 2017, the number of foreign-invested companies in the tertiary industry increased by 29,056, with the total number up by 27.3% YOY, accounting for 81.5% of all the new foreign-invested companies in the year; the amount of the actual FDI in the tertiary industry totaled USD 89.3 billion, accounting for 68.1% of the total actual FDI in the three main sectors, an increase of 6.1 percentage points over 2016.

·         Proportion of FDI in High-tech Industries Growing Significantly

The digital economy has risen in recent years as a key driver of the world economic development, attracting growing investment from global multinationals in high-tech industries. The rapidly enhanced digital technologies are changing the ways of businesses to manufacture essentially, sell products and provide services, bringing a disruptive impact on the international investment and operation of multinationals.

The Chinese government has vigorously promoted the “innovation-driven” economic growth model by launching policies and measures to encourage foreign investment in high-tech industries, including lowering the threshold, simplifying and optimizing the review and approval procedures for foreign investors. According to the statistics of MOFCOM, the proportion of FDI in high-tech industries in 2017 rose by 13.7 percentage points over 2012, and the amount of FDI climbed more than 60% compared with that of 2016. Playing a positive role in promoting China’s technological progress, foreign- invested companies, whose capabilities of innovation in developing products and technologies are above national average, have contributed to about 20% of the total R&D investment and effective invention patents of enterprises with an annual revenue of RMB 20 million or more in China.

·         Rapid Growth of FDI in Advanced Manufacturing

In 2017, China further lowered the market access threshold for foreign entry into general manufacturing and optimized the structure and quality of FDI. It also made vigorous efforts to attract FDI to advanced manufacturing, enabling the manufacturing industry to move towards the higher end of the value chain. According to the statistics of MOFCOM, a total of 1,032 foreign-invested companies specialized in high-tech manufacturing were established in China in 2017, up 29.3% YOY, whose actually utilized FDI increased by 7.6% YOY to USD 9.89 billion. All six domains of high-tech manufacturing realized YOY increase in actually utilized FDI, of which electronic and telecommunications equipment manufacturing received the biggest part (64.7%) of the total FDI in high-tech manufacturing or USD 6.4 billion, up 4.5% YOY. The FDI disbursements of other five domains were as follows: pharmaceutical manufacturing, USD 2.14 billion (up 1.8% YOY); medical device and instruments and apparatus manufacturing, USD 870 million (up 23.1% YOY); computers and office equipment manufacturing, USD 370 million (up 65.7% YOY); aeronautics and astronautics equipment manufacturing, USD 80 million (up 110.2% YOY); and photographic chemicals manufacturing, USD 40 million (up 737.4% YOY, representing the highest growth rate among all six domains).

·         Investment Patterns

Foreign investors mainly focus on equity and assets acquisition in China. Among the total transaction volume of foreign acquisitions in China, more than 85% took place in East China and over a half in Guangdong, Shanghai and Jiangsu. Moreover, more than 80% of foreign acquisitions happened in the service industry. In 2017, foreign investors acquired a total of 2,066 Chinese domestic enterprises, up 39.2% YOY, representing 5.8% of newly established foreign-invested companies, and made USD 14.57 billion of actual investment, down 22.9% YOY, accounting for 11.1% of the total actual investment from foreign investors. Compared to Central and West China, East China boasted the most dynamic foreign acquisition market, making up the largest proportion of foreign acquisitions in China. Among all the Chinese domestic enterprises acquired by foreign investors in 2017, 86.2% (or 1,780, up 40.1% YOY) were in East China, 7% (or 145, up 54.3% YOY) in Central China, and 6.8% (or 141, up 18.5% YOY) in West China. But all the three regions saw a decrease in the actual investment through foreign acquisition. The actual investment received by East China was USD 12.19 billion (or 83.7%), down 25.8% YOY; Central China, USD 640 million (or 4.4%), down 6.6% YOY; West China, USD 1.74 billion (or 12%), down 3% YOY.

Enterprises established through foreign acquisition are mainly Sino-foreign equity joint ventures (SJVs) and foreign-invested companies. In 2017, among all the enterprises established through foreign acquisition, 58.8% (or 1,215, up 39% YOY) were SJVs and 37.9% (or 783, up 37.9% YOY) were foreign-invested companies. And the two types of enterprises represented 45.7% (or USD 6.65 billion, down 37.4% YOY) and 42.8% (or USD 6.24 billion, up 56% YOY) of the total actual investment.

2.           FDI in China by Geographical Location

1)                    Geographical Distribution of FDI in China

After China adopted the reform and opening up policy, China’s eastern coastal region was the first to embrace the world, attracting a large number of foreign investors, who drastically boosted local economic development. At that time, with such historical background and a favorable geographic location, East China became the most popular target for foreign investors, while Central and West China were not in a position to attract sufficient FDI. After China became a WTO member, foreign investors began to move northwards, but Central and West China saw continued slow growth in FDI. As China’s economy continues to develop, East China has been upgrading and optimizing its industry structure, resulting in higher factor costs. Therefore, more and more foreign- invested companies have moved to Central and West China and other low-cost regions. Meanwhile, with the adoption of economic strategies, such as the Belt and Road Initiative and Yangtze River Economic Belt, and the release of relevant policy documents, such as Opinions on the Policies to Support the Development and Opening up of Major Border Regions and Directory of Competitive Industries for Foreign Investment in Central and West China, Central and West China continue to increase openness, creating huge attraction with foreign-invested companies. According to relevant statistics, West China reported RMB 28.84 billion of actually utilized FDI in 2017, up 13.2% YOY. In the first half of 2018, FDI continued to increase in Central China and West China. From January to May 2018, the amount of foreign investment in Central China reached RMB 24.19 billion, up 40.1% YOY, and that of West China reached 22.77 billion, up 11.9% YOY.

With a favorable business environment, a mature industry system and a pool of high- level talents, East China has become the most popular region for foreign investment in high-end manufacturing and high-tech services.

2)                     Current Utilization of FDI in Major Economic Zones

·         Pearl River Delta (PRD) Economic Zone

The PRD Economic Zone is located in the PRD region and consisted of nine cities in Guangdong Province. As the earliest region opening up to foreign investment, the PRD region is still of vital importance to the national economic restructuring. Undoubtedly, Guangdong is the key growth engine and a major recipient of FDI in this region.

The Economic Zone has seen continuous increase in actually utilized FDI since 2004. It reported USD 25.62 billion of actually utilized FDI in 2015, representing 95.3% of the total in Guangdong and 20.29% of the total in China.

·         Yangtze River Economic Belt

The 11 provinces and municipalities along the Yangtze River Economic Belt make up a large proportion of China’s actually utilized FDI, which has been around 50% in recent years and reached a peak of 56.32% in 2012. The proportion declined slightly in 2015 and 2016. Over the period from 2007 to 2016, a total of 121,011 foreign-invested companies were established in cities along the Belt, contributing a total of RMB 3.78 trillion or USD 585.54 billion of actually utilized FDI.

In 2016, with impacts of the economic cycle caused by the implementation of China’s medium and long-term development program, provinces and municipalities along the Belt struggled to deal with challenges brought about by industry restructuring and saw small decrease in FDI. Among all the foreign-invested companies established in 2016, 41.85% (or 11,677, down 2.48% YOY) were along the Belt. This region actually utilized RMB 394.08 billion or USD 61.06 billion of FDI in the year, down 1.5% YOY, representing 48.46% of the country’s total.

The development strategy of the Yangtze River Economic Belt has strengthened the leading role played by Shanghai and the YRD region, and promoted gradient transfer of industries, resulting in a steady growth of foreign investment in core cities along the Belt. In 2016, Shanghai, Wuhan and Chongqing all saw an increase in actually utilized FDI:  the  actual utilization  in Shanghai  slightly increased by 0.3% YOY  to  over RMB 119.4 billion (USD 18.5 billion), that in Wuhan by 16.1% YOY to RMB 55.01 billion (USD 8.52 billion), and that in Chongqing by 5.4% YOY to RMB 73.2 billion (USD 11.34 billion).

In September 2016, the Outline of Yangtze River Economic Belt Development Plan, which covers 11 provinces or municipalities including Shanghai, Jiangsu, Zhejiang, Anhui, Jiangxi, Hubei, Hunan, Chongqing, Sichuan, Yunnan and Guizhou, was officially released. The Outline aims to improve the open economy of cities located in the upper, middle and lower reaches of Yangtze River by fully capitalizing their distinctive strengths and advantages, as part of the endeavors to create two-way openings to both the east and west and synergistic development of coastal and inland areas.

The Outline focuses on the following aspects: First, strengthening the leading role of Shanghai and the YRD region, duplicating and promoting the reform and innovation experience gained from the SHFTZ; Second, building Yunnan Province as an economic hub with radiating effects on South Asia and Southeast Asia; Third, encouraging regional interaction and cooperation and industry clustering development, while promoting Chongqing city as a vital support to develop and open up western regions and other cities such as Chengdu, Wuhan, Changsha, Nanchang and Hefei as inland centers featured by open economy. The development strategy of the Yangtze River Economic Belt has added momentum to the opening up and growth of cities along the Belt.

•      Bohai Economic Rim

The strategy of Beijing-Tianjin-Hebei Coordinated Development, which covers Beijing and Tianjin Municipalities and Hebei Province, has played a pivotal role in shifting non- essential functions out of Beijing and facilitating industry transfer. In 2016, the Beijing- Tianjin-Hebei region was home to 2,341 foreign-invested companies, representing 8.39% of the total in the whole country, and reported a total FDI inflow of about RMB 196.72 billion (USD 30.48 billion), up 8.2% YOY, occupying 24.19% of that in China.

Among Beijing, Tianjin and Hebei, Beijing as a comprehensive pilot city for the service industry’s opening up has witnessed an increase in the proportion of FDI in the service industry and the quality of FDI utilization. Tianjin has become a new pool of FDI thanks to its pilot free trade zone, and enhanced its business environment by interacting with Beijing and Hebei to promote customs clearance integration. Hebei Province, as a place to undertake industrial transfers from Beijing and Tianjin, has introduced total investment amounting to RMB 382.5 billion (USD 59.27 billion) from Beijing and Tianjin in 2016. Hebei has benefited from this coordinated development, as indicated by the increase both in domestic capital and foreign investment.

In 2017, Beijing, Tianjin and Hebei respectively welcomed 1,309, 951 and 194 new foreign-invested companies, accounting for 53.34%, 38.75% and 7.9% of the total in this region. Their actual utilization of FDI respectively reached USD 24.33 billion, 10.61 billion and 8.94 billion, rising by 86.7%, 5% and 9.7% YOY. Notably, the China (Tianjin) Pilot Free Trade Zone has become a new hub to attract foreign investment, with its financial leasing industry leading the country in this regard.