Total foreign direct investment (FDI) growth in China is losing momentum. However, it remains robust in technology sectors. Leading multinational corporations want to expand and strengthen their operations in the country.
Geopolitical tensions between the United States and China are a significant deterrent. In October 2022, Washington imposed restrictions on exports of advanced semiconductor chips and equipment used to make them to China.
The Biden administration is now preparing an executive order to introduce outbound investment screening focused on technologies with possible military applications in semiconductors, quantum computing and artificial intelligence.
Beijing's Response
Beijing is responding with countermeasures against U.S. companies. For example, Micron Technology products have been banned from infrastructure projects as a network security risk.
China has also targeted professional services companies Bain & Co., Capvision and the Mintz Group, purportedly on security grounds.
This has rattled investors, who rely on investigation services such as these in China. Moves against these companies are also designed to reinforce Beijing's tightening control over information about the country.
Beijing has increased its powers to tackle “spying.” A new law expands the definition of espionage from covering state secrets and intelligence to "any documents, data, materials or items related to national security and interests.”
The undefined terms give the authorities broad leeway to decide what information counts. Furthermore, state media are encouraging every citizen to become a counter-intelligence agent, a rallying cry that should make every foreign company feel uneasy.
Yet, Beijing has higher priorities than making foreign businesses comfortable in China. China's leadership works tirelessly to maximize its control in all political, economic and societal areas. It also wants to demonstrate its strength and resolve in current geopolitical stand-offs.
Economic Diplomacy
China has embarked on an active economic and political diplomacy campaign targeting major European powers, especially Germany and France. Germany's Chancellor Olaf Scholz visited Beijing last November. France's President Emmanuel Macron was there in April. Premier Li Qiang made trips to Paris and Berlin last month.
Beijing wants to offset the economic and investment impact of U.S. policy on China. It also hopes to divide Europe and the United States where it can, to its geopolitical advantage.
Western leaders have moved on from talk of decoupling from China to the less negatively connotated term “de-risking.” However, for Beijing, as strategies that work against economic integration and cooperation, they amount to the same thing.
Business Environment
The Chinese government has pledged to shorten its list of restricted or prohibited industries, opening up sectors in advanced manufacturing and modern services to foreign participants.
It has also expanded the catalog of encouraged industries, adding pharmaceuticals, certain high-technology materials and other categories. Companies investing in industries in the catalog are eligible for tariff-free imports of equipment, preferential access to land and other benefits.
Beijing is also increasing efforts to promote foreign-funded R&D centers. Recently announced measures include allowing access to information held by national institutions and support for linkages with educational and research bodies, albeit under controlled conditions.
According to the government, the number of researchers employed by R&D centers established by large foreign companies increased from around 595,000 to around 716,000 between 2012 and 2021, and the number of patents filed by large foreign businesses from 68,000 to 241,000.
The more recent chill in China-U.S. relations is likely to have cooled those numbers.
Economic Signals
China has experienced erratic flows of inbound FDI over the past three years. The pandemic and global economic conditions partly explain that. However, FDI growth in high-tech manufacturing and services sectors accelerated last year and, while slowing, was still above average in January-May.
Last year, the growth of foreign investment in the manufacturing of electronic and communication equipment and R&D-related services was especially robust, at around 57% and 35% year-on-year, respectively.
In the first five months of this year, FDI in high-tech manufacturing increased by almost 31%.
FDI from the EU, especially France and Germany, and from the United Kingdom, South Korea and Japan increased the most.
According to the Ministry of Commerce, more than 300 contracts were signed for foreign investment-backed projects in advanced manufacturing, biomedicine, chemical engineering, energy and modern services in January-April.
Business Sentiment
Surveys of U.S. and European companies show a growing share of foreign companies operating in China getting increasingly cautious about investing. Still, the percentage of companies scaling down their operations or planning to leave the country remains marginal.
Moreover, leading multinational companies are embarking on significant new projects in high-tech sectors.
Germany's Bosch Group and Volkswagen have plans for around USD in investments each in auto-related activities. France's Airbus and U.S. company Tesla continue to invest in facilities in China. In the bio-sector, U.S. developer of gene delivery products VectorBuilder wants to build a USD500mn gene delivery research and manufacturing campus in Guangzhou.