FDI into China reaches new highs in 2021: What does it mean?
How is China performing in FDI inflows?
Global Foreign Direct Investment fell sharply by 32% to 1031 billion USD in 2020, according to the OECD. However, China's FDI inflows bucked the trend and rose to 212 billion USD by increasing 14%, surpassing the US to become the world's largest recipient of foreign capital. According to data released by the Ministry of Commerce in China, the actual use of foreign capital in the country hit a record of 173.5 billion USD in 2021 – increasing by 20% YoY. We are also witnessing a rising interest in investing into the China footprint in our consulting practice.
Why does China demonstrate such significant growth?
- Economic recovery: China’s fast rebound after the COVID-19 shock (positive growth in 2020 and 8% in 2021) resulted in a relative outperformance compared to other countries. For most multinational enterprise the Chinese market is one of the key revenue and growth drivers.
- FDI-friendly law: The country has implemented a new Foreign Investment Law (effective 2020) which aims to guarantee fair and equal treatment of foreign-invested companies, while also drastically reducing the negative list of industries where non-Chinese firms are not allowed to invest in. This means easier entry, faster processes and less ”red tape”.
- Foreign business localization: Foreign companies continue to see potentials and opportunities in the Chinese market, but also face an increasingly challenging business environment that requires adapted services and agile decision-making. Thus, they are strategically implementing localization plans and seek for a more “Chinese” way of doing business.
What are the key features of FDI in China?
FDI inflows into China in recent years show features that are reflecting both traditional investment patterns but also the country’s transition to a more consumption- and service-oriented economy.
- Structure: service industry accounts for most significant growth. In 2021, the actual use of foreign capital in China’s service industry was 143 billion USD (~80% of total), showing an increase of 17% YoY. The high-tech industry incl. manufacturing (e.g. advanced manufacturing, bio-tech) and service (e.g. telecommunication, R&D) also rose considerably by 11% and 19% respectively.
- Region: the middle region demonstrates huge potential in receiving FDI. In 202, the actual use of FDI in Central China (e.g. Hunan, Henan) rose drastically by 21%. However, eastern (coastal) provinces still accounted for the majority share of investment and also increased by 15%.
- Source: inflow source countries remain stable. The top 15 countries/regions that have made the most contribution in China’s historical FDI (e.g. HK, Singapore, Japan, Korea, US, UK, Netherland), still play a fundamental role.
What does it mean for companies and investors?
- Despite all challenges, China remains an attractive place to invest: the country’s enormous market, well established infrastructure and supply chains, as well as large talent pool make it imperative for global companies to be present on the ground – even in times of political tensions.
- But the right strategy is more important than ever: right market approach required to deal with new local regulations, rising domestic competition and slowing overall growth momentum.