China’s campaign to win investment wavers as overseas capital plays waiting game

Overseas enterprises and investors have not rushed back into China, with foreign direct investment figures not yet showing a renewal of confidence
Geopolitical shifts and an uncertain environment have prevented a return to the status quo, with many adopting ‘new working models’ to limit their exposure

China's economic recovery

Kinling Loin Beijing

Published: 11:00pm, 22 Apr 2024

Why you can trust SCMP

The “new working models” of international enterprises in China and Beijing’s heavy focus on self-reliance have deterred a resurgence of foreign direct investment (FDI), business leaders said, as inflows fell more than a quarter from the previous year.

FDI movement into China from January to March was 301 billion yuan (US$41.6 billion), down 26 per cent from last year according to official numbers released last Friday.

While Beijing hailed a reported gross domestic product growth of 5.3 per cent over the same period as an indication its economy is in stable recovery, notable figures in the field said firms are staying cautious for several reasons.

Ker Gibbs, former president of the American Chamber of Commerce in Shanghai, said American companies now operate in China based on a “new working model” – one where the localisation of their Chinese operations continues, but has became more pronounced after foreign staff members have left the country en masse amid changing policies and a degenerating bilateral relationship.

It’s a drag on business, but it’s not gonna shut anything down

Ker Gibbs

“Companies are separating their China operations so they function in more of a silo. Nobody is happy about this, but it’s the reality of the new working model,” said Gibbs, who is now an executive-in-residence at the University of San Francisco’s China Business Studies Initiative.

“It slows down investment. It reduces enthusiasm for investment. It’s a drag on business, but it’s not gonna shut anything down. It won’t cause them to withdraw from China. But it’s a drag on business.”

Gibbs added that the problem of communication has also become more prominent, as many executives still face challenges travelling to China due to visa problems and a lack of flights.

While the FDI change from the first quarter was a 41.7 per cent increase over the last quarter of 2023, the data for March showed slower growth compared to the first two months of the year.

New actual utilised foreign investment into China in March was 87 billion yuan, a deceleration from 113 billion yuan in January and 102 billion yuan in February.

The March data was also a 38 per cent drop compared to the same month in 2023, according to the Ministry of Commerce.

The ministry, which has not published FDI figures in US dollar terms since last year, said the first quarter decline was due to a high baseline from the same period in 2023.

That quarter saw a record inflow of investment after China first reopened its doors following three years of stringent Covid control policies.

The ministry added that 12,086 new foreign-invested firms were set up across the country from January to March, a 20.7 per cent increase compared with the same period last year.

Joerg Wuttke, president emeritus of the European Union Chamber of Commerce in China, said while the size of the Chinese economy remains a reason for many foreign investors to stay, their “appetite” for investing in China has been slow to come back.

“China has a real problem of having international participants in this economy. And the problem has to do with the fact that they are also still emphasising self-reliance in some business segments,” Wuttke said.

Traditional areas have reached saturation for both private and foreign investors. We should think about how to open up new industries for their investments

Zheng Yongnian

For example, he added, the automotive, machinery and chemical industries are areas where China wants foreign investment, while tech-related companies have a hard time in the Chinese market.

Zheng Yongnian, a prominent political economist and a long-time adviser to the Chinese government, had similar opinions, saying the next step for China to boost investment would be identifying new industries in which foreign companies could take part.

“Traditional areas for economic investments have reached saturation for both private and foreign investors. We should think about how to open up new industries for their investments as we attempt to find new productive forces for high-quality economic development,” Zheng said, referring to a phrase coined by Beijing to identify the economic sectors with the highest potential for growth and innovation.

Zheng, president of the Institute for International Affairs, Qianhai – a think tank based in Shenzhen – added that new growth drivers such as the digital and green economies should offer more opportunities for the participation of private and foreign investors.

Beijing has been pushing for the development of these “new productive forces” to boost economic activity as well as overseas confidence, as utilised FDI flows – which had continued to grow during the pandemic years – fell by 8 per cent in 2023, a year when direct investment liabilities saw their smallest increase in three decades.

China’s slowing economy and geopolitical tensions have been frequently cited as reasons foreign investors have remained wary of a full-scale return.

A survey from the American Chamber of Commerce published in February this year showed nearly half of all respondents had no plans to expand their investment in the country, even as some grew optimistic about stabilising US-China ties.