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A disruptive zero-Covid policy and other economic uncertainties are resulting in many smaller European firms trying to reduce their dependency on China. Photo: Reuters

China’s rising FDI inflows questioned as bulk of investments from EU come from a few large firms

  • ‘Virtually no new European firms have chosen to enter the Chinese market in recent years,’ according to US-based Rhodium Group
  • China’s environment for foreign firms has ‘deteriorated’ in recent months, resulting in increasingly louder calls for more to be done to support foreign and private businesses
China’s receipt of foreign direct investment (FDI) may not be as promising as its double-digit growth figures suggest, with new inflows being increasingly concentrated around a handful of large multinationals, certain sectors and countries, according to new research findings.

A study from New York-based Rhodium Group also noted that there could be an acceleration in European firms trying to reduce their dependency on China, in light of rising geopolitical tensions, persistent and disruptive zero-Covid controls, and other economic uncertainties in China.

The findings sounded an alarm among Beijing’s policymakers who try to use big investment projects to create an image of opening up. But the reality has turned increasingly complicated – from the technological-containment and economic-decoupling attempts of the United States, to foreign companies’ complaints over China’s rigid coronavirus controls, to lingering worries over China’s push toward self-sufficiency.

China’s foreign firms, struggling to survive, brace for whatever comes next

“After decades in which China felt like a one-way bet for European firms, market conditions have become far more challenging due to restrictive Covid-19 policies, slowing economic growth and rising geopolitical tensions,” according to the findings released by Rhodium Group researchers Agatha Kratz, Noah Barkin and Lauren Dudley on Wednesday.

“Virtually no new European firms have chosen to enter the Chinese market in recent years,” they said. “And acquisitions of Chinese firms have stalled, with greenfield investments increasingly dominating the FDI landscape.”

The research findings challenge China’s depiction of being a hotspot for FDI. Overseas investment inflows jumped by 20.2 per cent from a year earlier to US$173.5 billion in 2021, according to data from the Chinese Ministry of Commerce, while the momentum continued with January-July FDI rising 21.5 per cent from a year earlier to US$123.9 billion.

Investments from European countries make the EU the third-largest source of FDI into mainland China, following Hong Kong and Singapore.

However, Rhodium found that the top 10 European firms investing in China made up nearly 80 per cent of Europe’s total investments from 2018-21, marking a sharp increase from 49 per cent during the 2008-17 period. German carmakers Volkswagen, BMW and Daimler, and chemicals giant BASF, led the way in China, accounting for 34 per cent of all European FDI into China by value in the past four years.

Five sectors – autos, food processing, pharmaceutical/biotech, chemicals and consumer products manufacturing – now make up nearly 70 per cent of all FDI, compared with 57 per cent from 2008-12 and 65 per cent from 2013-17, the report showed.

Four countries – Germany, the Netherlands, the United Kingdom and France – made up 87 per cent of the total investment value in the past four years. German businesses contributed 43 per cent of the money pouring into the world’s second-largest economy from Europe.


Earlier this month, when BASF kicked off initial operations at its 10-billion-euro (US$10 billion) Zhanjiang plant – the largest investment project ever by a German business in China – it drew the participation of high-ranking Chinese officials, including Vice-Premier Han Zheng and Li Xi, a Politburo member and party boss of Guangdong province.

Who is going to invest in a place that they can’t travel to and experience first-hand? It is not a matter of geopolitics, but a matter of money and business.
Massimo Bagnasco, EU Chamber of Commerce (China)

“It is significant to deepen China-German economic cooperation, jointly counter the pandemic shocks and safeguard the global petrochemical industry chains,” hailed the official Xinhua News Agency.


Massimo Bagnasco, vice-president of the European Union Chamber of Commerce in China, also spoke to the difficulties that foreign firms have been facing in China over the past few months.

“The first quarter of 2022 was successful for multinational companies operating in several sectors,” Bagnasco told the Post. “Despite China’s ongoing Covid restrictions, businesses were largely able to maintain their operations and travel to do business within mainland China, although they had to operate within closed-loop systems at the national level.

“Things have since deteriorated, with the lack of ability to freely move within mainland China now a source of mass uncertainty. Businesses need more certainty and visibility. This is essential not only for companies that are operating in China, but also for attracting new foreign investment. Who is going to invest in a place that they can’t travel to and experience first-hand? It is not a matter of geopolitics, but a matter of money and business.”

How much is China’s foreign direct investment, is it still a good destination?

Rhodium’s conversations with stakeholders indicated that smaller European companies are particularly reluctant to accept the growing risks of investing in China, owing largely to the pandemic and China’s accompanying zero-Covid strategy.

“We believe it is likely that the gap between the ‘chosen few’ and the broader swathe of European companies that are reducing their China exposure – either by paring back their footprint on the ground or putting future investments into other markets – could become more pronounced in the years to come,” the research firm said.

Domestically, calls for a better environment for foreign and private businesses have also got louder ahead of the upcoming 20th party congress.

Xia Bin, a former counsellor to the State Council, recently said that it was of the utmost importance to restore the confidence of entrepreneurs and rebuild market confidence via institutional arrangements.

“We need to ensure that market entities of different ownership can compete in an open and just manner,” Xia said at a conference organised by Changjiang Securities two weeks ago.


Foreign commerce chambers have traditionally cited issues such as market barriers and an uneven playing field as the major problems facing their respective multinationals. But a variety of new concerns have emerged in recent years, including coronavirus disruptions, data-security issues and the politicalisation of economic matters.

At Tuesday’s meeting of the State Council, Premier Li Keqiang vowed to kick off a batch of key foreign investment projects as soon as possible, and to further facilitate the entry and exit of foreign businesspeople, technical personnel and their family members. He also instructed major FDI provinces to strengthen their coordination with, and enhance services available to, foreign investors.