MNI: China Needs Clarity, Opening To Reverse FDI Drop

MNI (BEIJING) - China needs to clarify rules that protect foreign investors and further open up its service sector if it is to reverse a near one-third drop in foreign direct investment so far this year, advisors and analysts told MNI, though some noted the country also faces long-term structural challenges.

Apple’s recent decision to reverse the transfer of some production to India signalled that China retains significant advantages in manufacturing, logistics and labour despite the 31.5% y/y drop in FDI during the first eight months of this year, said Chen Wenling, chief economist at the China Center for International Economic Exchanges, a high-level think tank.

But officials need to ensure the central government’s reform commitments, including ensuring equal foreign access to public procurement tenders, announced at the CCP’s Third Plenum this year, are implemented by local governments, given local administrative monopolies still existin some places, Chen Wenling said.

Other necessary measures include reducing the negative list of sectors blocked to non-Chinese firms, especially in healthcare and education, she continued, noting such measures would push domestic reforms and improve quality standards.

A State Council meeting in June highlighted stabilising foreign investment as a key focus given international firms’ role in supporting high-quality economic development and dual circulation, which emphasises the positive interplay between domestic and overseas markets.

A period of relatively higher U.S. interest rates had exacerbated the drain on FDI by making it more attractive for companies to repatriate profits out of China, Chen Wenling said, noting the process should be reversed during the upcoming Federal Reserve cutting cycle.

Other low-cost destinations have become increasingly competitive, while U.S. policy has actively discouraged some investment in China, Chen Wenling added. (See MNI EM INTERVIEW: U.S. Will Find Replacing China EV Parts Difficult)

STRUCTURAL OUTFLOW

However, Chen Li, an analyst at ANBOUND, a government advisory think tank, said foreign investment had fallen due to longer-term structural factors which would prove difficult to reverse, especially once capital was redistributed outside China, even if the domestic economy rebounded. 

Although high base effects from 2023’s CNY1.13 trillion FDI, the third highest on record, had contributed to this year’s decrease, strong local competition, higher costs, increasing U.S. tensions, slower global growth and rising protectionism had driven the drop, Chen Li noted.

“China’s manufacturing advantages can only slow this trend, but not reverse it,” she warned.

Falling foreign investment would also have adverse secondary effects on the wider economy such as higher unemployment, less capital efficiency and supply chain disruption, Chen Li continued, noting international companies accounted for nearly one-third of China’s total exports and about 20% of the national tax revenue.

OPENING

Beijing opened its medical sector last week to allow wholly foreign-owned hospitals in major cities and fully liberalised its manufacturing sector.

Opening the healthcare industry would attract multinational enterprises given the large profit margins and lower research costs than in the U.S. and Europe, Chen Li argued.

However, to improve FDI sentiment, authorities needed to clarify differing policy interpretations and improve communication channels to minimise misunderstandings, Chen Li noted.

She said the concept of national security needed clarification to avoid ad-hoc decision making, which caused foreign investors to suffer additional losses and decreased confidence.