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Foreign direct investment in China now stands at US$117 billion, a year-on-year drop. Photo: Simon Song

Foreign direct investment in China drops despite efforts to attract overseas capital

  • Commerce ministry blames slow recovery after the coronavirus for 5.1 per cent decline in its foreign direct investment in the first eight months of the year
  • Despite Beijing’s efforts to attract investment, other countries are increasingly looking to Southeast Asia

Foreign direct investment in China dropped by more than 5 per cent in the first eight months of the year despite an all-out effort to attract foreign capital, according to official figures.

The Ministry of Commerce, said it had fallen by 5.1 per cent in the first eight months of 2023, year on year, to 847.2 billion yuan (US$117 billion)

The ministry, which has not yet published the number in US dollar terms, said the decline was due to the slow recovery of the global economy and a high base last year.

From January to July, the US-dollar-denominated total had fallen by 9.8 per cent from a year earlier to US$111.8 billion, according to the ministry.

Foreign investment is a market behaviour, and periodic fluctuations are normal
Ministry of Commerce

“Foreign investment is a market behaviour, and periodic fluctuations are normal. We need to look at both scale and structure, as well as both the present and the long term,” the ministry’s official release said.

The actual use of foreign direct investment (FDI) in the manufacturing sector rose by 6.8 per cent year on year from January to August, and that in hi-tech manufacturing increased by 19.7 per cent, which means the quality of investment has continued to improve, the official said.

During that period, 33,154 new foreign-invested firms were set up across the country, increasing by 33 per cent compared with the same time last year, and the figures reflected “the confidence of foreign investors in long-term investment in China,” according to the official.

Beijing has repeatedly pledged to attract foreign investment to boost its post-pandemic economic recovery, but foreign countries have increasingly been looking to Southeast Asia instead.

Following foreign investors ‘blindly’ not a good investment strategy: Economic Daily

Business lobby groups in China have also raised concerns about restrictions on cross-border data flow, a new anti-espionage law and a series of investigations into US consultancies, which they said have marred business confidence.

In the second quarter, direct investment liabilities - an alternative measurement of new foreign investment in China - plunged to US$4.9 billion, the lowest figure since records began in early 1998, according to the balance of payment data released by the State Administration of Foreign Exchange.

“It’s not a big surprise given the escalating geopolitical tensions. We believe the decoupling might be biggest drag of China’s future growth,” economists from Nomura said in a note last month.

“The plunging FDI may have significantly weighed on the export sector, as exports by foreign companies operating in China account for about 30 per cent of China’s total exports.”

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The process seems to have already taken a toll on China’s exports. According to official customs data, exports from foreign manufacturers declined by 15.5 per cent, year on year, in the first seven months of 2023, compared with a 9 per cent general decline among all exporters.

“In the past, the impact of geopolitics was more about the future economy, as in it had limited impact to the current state of economy,” Lu Ting, chief China economist at Nomura , said in a speech earlier this month.

“But this year, everyone has already felt the shock,” he said.