The state of play: FDI in China

24 August 2020 (Last Updated September 18th, 2020 11:37)

Despite trade wars and rising geopolitical tensions, China remains one the world’s leading destinations for FDI. Sebastian Shehadi reports.

The state of play: FDI in China
Shanghai, China: US companies have made huge investments into China despite the trade war between the two countries, including Tesla’s $2bn gigafactory in Shanghai in 2019. Credit: Shutterstock

Despite trade wars and rising geopolitical tensions, China remains one the world’s leading destinations for FDI. Sebastian Shehadi reports.

Foreign direct investment (FDI) to China has grown exponentially since the early 1980s, hitting a record high of $141bn in 2019, according to the 2020 World Investment Report from United Nations Conference on Trade and Development (UNCTAD).

To put that in perspective, China was the world’s second-largest destination for FDI in 2019, after the US, and therefore the largest recipient in Asia. In terms of FDI stock, China has received significantly more capital from foreign direct investors than any other country, standing at a whopping $1.25trn in 2018 – which is more than double its 2014 stock – according to UNCTAD.

This growth has been attributed by liberalisation plans, the rapid development of the high-tech sector and the establishment of free trade zones, according to Santander Trade, a leading provider of international market information.

Investments into China have mainly targeted manufacturing, computer services, real estate, leasing business and services, wholesale and retail trade, financial intermediation, scientific research, transport, electricity and construction – in that order – according to the China Statistical Yearbook 2018. Some of the largest projects have come from Germany’s BASF, Volkswagen and Daimler, the US’s ExxonMobil and Tesla, and Japan’s Toyota.

Hong Kong, Singapore, the Virgin Islands, South Korea, Japan, the US, the Cayman Islands, the Netherlands, Taiwan and Germany were China’s main sources of FDI in 2018 – in that order – according to the yearbook.

Trade war impact

The US-China trade war has had a noticeable impact on greenfield FDI coming into China, leading foreign investors to decrease their capital expenditure by 45% between 2018 and 2019, according to the fDi Report 2020.

This is due in large part to US investment into China dropping by 40.97% in 2019, though greenfield FDI to China from the UK, Germany and Switzerland increased markedly that year. Nonetheless, the US remained the biggest source of investment into China in 2019, according to the fDi Report.

Indeed, in spite of the trade war China has witnessed some enormous foreign investments from US companies, such as Tesla’s $2bn gigafactory in Shanghai in 2019.

Like all countries, China has been severely affected by the Covid-19 pandemic. In the first quarter of 2020, its economy contracted for the first time on record, with a growth rate of -6.8%. Headline FDI to China, excluding the financial sector, dropped by 13% to $31bn in this quarter, compared with the same quarter in 2019, according to UNCTAD.

“In stimulating the economy and encouraging FDI, the [Chinese] government issued relief policies and measures to stabilise foreign investment, including end-to-end services to large-scale foreign-invested projects under construction to guarantee completion as planned,” says the UNCTAD report.

The pandemic did not deter Starbucks’ March 2020 announcement of a $130m investment in Jiangsu, where it will open a roasting facility – the company’s largest manufacturing investment outside of the US and its first in Asia.

China, which for a country of its size remains fairly restrictive in terms of FDI regulation, should benefit from the implementation of its new investment liberalisation policies – namely the removal of foreign ownership limitations in the financial and automotive industries.