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

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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

Published: 8:00am, 16 Sep 2022Updated: 9:18am, 16 Sep 2022

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.

“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.