Foreign direct investment (FDI) in China

FDI in Figures

According to the World Investment Report 2024 published by UNCTAD, FDI inflows into China decreased by 13.6% year-on-year in 2023, totalling USD 163.2 billion. Nevertheless, the country was still the second-largest FDI recipient in the world, accounting for 21% of global FDI. At the end of the same period, the total stock of inward FDI stood at USD 3.66 trillion. China is also the third-largest investor worldwide, with a stock of outward FDI estimated at USD 2.94 trillion. Among the top multinationals, the largest manufacturing investors in China include Hon Hai Precision Industry (Taiwan), BASF (Germany), and car manufacturers like Toyota (Japan), Volkswagen and BMW (Germany), and Samsung Electronics (South Korea). These companies have long maintained significant manufacturing operations in China. However, since 2019, they've reduced greenfield investments in favour of partnerships with local manufacturers, particularly in the EV market. Hon Hai and Samsung have reassessed their manufacturing footprint in China due to trade tensions. A large portion of their high-tech products, like chips and electronics, are produced in China and exported to the U.S. Hon Hai cut its greenfield projects in China from 23 to 6, while Samsung reduced its from 9 to 1. Both companies are now investing in new facilities in their home markets and countries like Vietnam, India, and Mexico. Official governmental data show that, in 2024, China saw 59,080 new foreign-invested enterprises, a 9.9% increase from the previous year. However, actual FDI utilization fell 27.1%, totalling CNY 826.25 billion (USD 115.56 billion). The manufacturing sector received CNY 221.21 billion (USD 30.85 billion), while the service sector attracted CNY 584.56 billion (USD 81.47 billion). High-tech manufacturing led high-tech sectors with CNY 96.29 billion (USD 13.42 billion), making up 11.7% of total FDI. Notable growth occurred in medical instruments (+98.7%), professional technical services (+40.8%), and computer and office equipment (+21.9%). Among source countries, Spain saw the largest increase in investment (+130.8%), followed by Singapore (+10.8%), Germany (+2.2%), and Switzerland (+1%).

In recent years, China has made significant improvements across various subcomponents, from streamlining the process for starting a business to enhancing electricity access and simplifying construction permit procedures. The country has implemented a series of reforms aimed at improving the overall business regulatory environment. These reforms primarily focus on improving the efficiency of business processes, including tax cuts, tariff reductions, and lowering barriers for foreign investors. To attract more foreign investment, China has introduced mechanisms to improve the implementation of major foreign investment projects, reduce import tariffs, streamline customs clearance, and establish an online filing system to regulate FDI. With a large pool of employees and potential partners eager to innovate, China remains an appealing base for low-cost production, making it an attractive market for investors. However, certain factors continue to pose challenges to foreign investment, including a lack of transparency, legal uncertainty, weak intellectual property rights protection, corruption, and protectionist policies that favour local businesses. The revised investment screening mechanism under the Measures on Security Reviews on Foreign Investments, which came into effect on January 18, 2021, was implemented without a public comment period or prior consultation with the business community. This move has drawn criticism from foreign investors, who raised concerns about the broad scope of the new rules, the absence of a threshold for triggering reviews, and the inclusion of greenfield investments—an approach that deviates from practices in many other countries. Furthermore, the introduction of guidance on Neutralizing Extra-Territorial Application of Unjustified Foreign Legislation Measures, similar to "blocking statutes" in other markets, has heightened concerns about navigating the complex legal landscape and complying with both host-country regulations and Chinese laws. Foreign investors have expressed frustration over national security-related legislation, which is increasingly seen as restricting market access in China. Additionally, on 1 November 2024, China issued revised regulations for foreign investment in its listed companies, lowering the minimum overseas assets requirement for strategic investors from USD 100 million to USD 50 million. Finally, the country ranks 11th among the 133 economies on the Global Innovation Index 2024 and 151st out of 184 on the latest Index of Economic Freedom. It also ranks 76th/180 on the 2024 Corruption Perception Index.

What to consider if you invest in China

Strong Points

Strong points for FDI in China include:

• The largest internal market in the world, with 1.44 billion potential customers
• Sovereign risk contained as public debt remains mainly domestic and denominated in local currency
• Importance of foreign currency reserves and public debt owned by Chinese government and individuals
• A well-developed production sector (manufacturing sector and heavy industry)
• A favourable geographic location (close to emerging Asian markets, to Japan, maritime frontage)
• Top economy in terms of purchasing power parity (PPP) thanks to rapid growth of the economy
• Labour costs remain comparatively low, although the situation is changing in certain areas
• New opportunities with the development of the western provinces (particularly Sichuan province)
• Development of a new export network (Silk Road network)

Weak Points

Some of the disadvantages for FDI in China include:

• An ever-changing legal environment
• Bureaucratic and administrative complexities
• A lack of transparency and weak intellectual property rights protection
• Ageing population
• High level of corporate indebtedness
• Production overcapacity in several sectors
• A strongly degraded environmental situation in several big cities
• Cultural differences in business practices that may be difficult for foreigners to learn and apply in new business situations
• Underdeveloped middle management and low rate of qualified workers

Government Measures to Motivate or Restrict FDI

Generally speaking, the Chinese government is more restrictive than other big economies in regard to foreign investment, with numerous sectors closed to FDI. State companies and "national flagships" are protected (discriminatory practises, non-independent judicial power, selective application of regulations). Until a few months ago, the Chinese state required forced technology transfer and its system of intellectual property protection was among the weakest in most industrialised countries.

The Chinese government encourages investment in the following industries or sectors: high technology, production of equipment or new materials, service sector, recycling, use of renewable energies and protection of the environment. In addition, the country appears to discourage foreign investment in key sectors, for which China seeks to transform domestic firms into globally competitive multinational corporations and sectors that have historically benefited from state monopolies or traditionally of State. The government also discourages investments intended to profit from speculation (money, real estate, or assets). In addition, the government plans to limit foreign investment in resource-intensive and highly polluting industries.

The Law on Foreign Investments of the People's Republic of China, adopted at the second session of the 13th National People's Congress on 15 March 2019, has been in force since 1 January 2020. The new Foreign Investment Law seeks to address common complaints from foreign businesses and governments. The Law specifically prohibits the government and government officials from forcing transfer of technology, while technology cooperation on the basis of free will and business rules is encouraged by the state. Indeed, article 22 stats that the State shall protect the intellectual property rights of foreign investors and foreign-funded enterprises. The law also gives the possibility to foreign investors to receive the same treatment when they apply for licences (article 30) and participate in public procurement (article 16). The competent departments for commerce (Ministry of Commerce) and for investment (National Development and Reform Commission) are delegated major responsibility to promote, protect and manage foreign investment.

On June 23, 2020, the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOF) jointly issued two "negative lists" (on Foreign Investment and Free Trade Zone Special Administrative Measures) and a draft edition of the Catalogue of Encouraged Industries for Foreign Investment. Compared with the 2019 edition (full list in Chinese available here), the proposed 2020 Foreign Investment encouraged catalogue has been further lengthened, with 125 new industries added and 76 previously listed industries amended. There are no major changes compared to the 2019 catalogue; it welcomes more FDI in the following three main areas of China: high-end production; production-oriented service industries; China’s central, western, and northeastern provinces.

Bilateral investment conventions signed by China

China has signed bilateral agreements for investments with several countries. To see the list of the countries, consult UNCTAD website.