Foreign Direct Investment

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.