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According to the World Investment Report 2023 published by UNCTAD, FDI inflows into China increased by 4.5% year-on-year in 2022, totalling USD 189.1 billion (above the pre-COVID level), making the country the second-largest host country in the world. The increase was concentrated in manufacturing and high-tech industries (mainly electronics and communication equipment) and came mostly from European MNEs. Cross-border M&A sales tripled to USD 15 billion. The largest deals were the 4 billion USD acquisition by BMW (Germany) of a further 25% stake in BMW Brilliance Automotive, a Beijing-based manufacturer and wholesaler, and the USD 3.4 billion merger of COVA Acquisition (United States) and ECARX Holdings, a Shanghai-based manufacturer of semiconductors and electronics. In the same year, the total stock of FDI stood at USD 3.82 trillion, around 21.1% of the country’s GDP. China is also the third-largest investor worldwide, with a stock of outward FDI estimated at USD 2.93 trillion at the end of 2022. Hong Kong, the Virgin Islands, Japan, Singapore and the United States are among the major investors (data U.S. Trade Administration). Investments are mainly oriented towards manufacturing, real estate, leasing business and services, and computer services. Data from the Peterson Institute for International Economics and sourced from China’s State Administration of Foreign Exchange (SAFE) shows FDI inflows have hit multi-year lows in 2023, totalling only USD 15 billion. Among the reasons for the decrease were escalating geopolitical tensions, as the “chip war” with the U.S. concerns foreign investors, particularly American-headquartered companies operating in China, leading to hesitancy in investing in local firms. Moreover, the closure of due diligence firms, essential for foreign investors to make informed decisions regarding Chinese companies, coupled with a new national security law targeting cross-border data flows, has discouraged significant investments.
Over the last few years, China made improvements 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. 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. The revised investment screening mechanism under the Measures on Security Reviews on Foreign Investments took effect on January 18, 2021, without any public comment period or prior consultation with the business community. Foreign investors expressed dissatisfaction with China's new investment screening rules, citing their broad scope, lack of an investment threshold triggering a review, and inclusion of greenfield investments, a departure from practices in most other countries. Additionally, concerns grew among foreign investors due to new guidance on Neutralizing Extra-Territorial Application of Unjustified Foreign Legislation Measures, a measure akin to "blocking statutes" in other markets, exacerbating worries about the legal complexities of complying with both host-country regulations and those in China. Foreign investors lamented that national security-related legislation increasingly undermined market access in China. Finally, the country ranks 12th among the 132 economies on the Global Innovation Index 2023 and 151st out of 184 on the 2023 Index of Economic Freedom.
Foreign Direct Investment | 2020 | 2021 | 2022 |
---|---|---|---|
FDI Inward Flow (million USD) | 149,342 | 180,957 | 189,132 |
FDI Stock (million USD) | 1,918,828 | 3,633,317 | -6,914,969 |
Number of Greenfield Investments* | 413 | 482 | 357 |
Value of Greenfield Investments (million USD) | 33,637 | 31,716 | 17,966 |
Source: UNCTAD, Latest data available.
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.
Main Investing Countries | 2022, in % |
---|---|
Hong Kong | 72.6 |
Singapore | 5.6 |
Virgin Islands | 3.5 |
South Korea | 3.5 |
Japan | 2.4 |
Netherlands | 2.4 |
Germany | 1.4 |
Main Invested Sectors | 2022, in % |
---|---|
Manufacturing | 26.3 |
Leasing and business services | 17.5 |
Scientific research, technical service and geologic prospecting | 16.0 |
Information transmission, computer services and software | 12.6 |
Wholesale and retail trade | 7.7 |
Real estate | 7.5 |
Financial intermediation | 3.6 |
Source: National Bureau of Statistics, Latest data available.
Strong points for FDI in China include:
Some of the disadvantages for FDI in China include:
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.
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: The World Bank - Doing Business, Latest data available.
According to the Notice on Implementing the Policy of Inclusive Tax Relief for Small and Micro Enterprises, published by the Ministry of Finance in January 2019, China expanded existing preferential policies for small and low-profit enterprises. Companies with annual taxable income below RMB 1 million (US$147,290) per year can benefit from a preferential corporate income tax (CIT) rate of 20 per cent, they are only taxed on 25 per cent of their income, while the remaining 75 per cent is tax-free.
The 14 coastal cities are Dalian (in the province of Liaonong), Shanghai, Ningbo, Wenzhou (in the province of Zhejiang), Fuzhou (in the province of Fujian), Guangzhou, Zhanjiang (in the province of Guangdong), Beihai (in the autonomous region of Guangxi Zhuang), Tianjin, Yantai, Qingdao (in the province of Shandong) and Lianyungang, Nantong (in the province of Jiangsu). For the past few years, other cities have also been regarded as coastal towns profiting from the same status. Unlike the 5 special zones, these cities were not underdeveloped, but key industrial centres in China. Overseas investment has facilitated improvements to the infrastructure and the creation of new, more advanced ones.
In August 2019, China announced that it will expand the Pilot Free Trade Zones (FTZs) to six new provinces across the country. These are Jiangsu, Shandong, Hebei, Heilongjiang, Guanxi and Yunnan, bringing the total number of Chinese FTZs from 12 to 18.
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Latest update: July 2024