China remains an FDI hot spot
Economic recovery, supportive policies, services sector expansion spur foreign capital inflows
Despite uncertainties in the global economic landscape, and the impact of the novel coronavirus outbreak on industrial and supply chains, leading to sharp contraction in global demand, China has seen steady growth in foreign direct investment inflows this year, albeit from a low base in 2020, while also registering remarkable expansion from the 2019 level.
In January-April, China’s actual use of FDI reached 397.07 billion yuan ($61.75 billion), up 38.6 percent year-on-year and 30.1 percent over the same period in 2019.
The use of FDI grew rapidly in the services industry, reaching 312.94 billion yuan in the four months, a year-on-year increase of 46.8 percent and accounting for the lion’s share of China’s actual use of FDI.
The wholesale and retail, leasing and business services industries have all registered rapid growth. The value and proportion of FDI in the services industry has improved steadily, which can be attributed to changes in China’s production factors and resources, industrial restructuring and policy adjustments.
In recent years, the opening up of China’s services industry has accelerated, thanks to further easing of foreign investment in key sectors such as finance and education. Now, more foreign enterprises are enjoying financial support and services for key projects.
The use of FDI in high-tech industries has grown rapidly and the structure has improved. In recent years, China’s scientific and technological innovation capabilities have improved greatly and its booming technological innovation has attracted global investors.
Foreign-funded projects with high technological content have been lured by China’s strength in scientific research and education as well as its huge market with great potential.
China’s industrial upgrading and technological progress have accelerated with the introduction of new technologies and concepts by foreign investors, not to forget the competition of various forms between foreign-funded and Chinese enterprises.
In the first four months, the use of FDI in hightech industries increased 29.1 percent year-on-year, in which that of high-tech services industries covering services for R&D and design, application of scientific and technological research, e-commerce and information grew 34 percent.
High-tech manufacturing industries saw the year-on-year FDI use climb 15.4 percent. Among high-tech manufacturing industries, electronics and the communications equipment manufacturing industry attracted the most FDI.
Despite policy uncertainties surrounding global investment growth and a sharp decline in global FDI, China managed to attract an impressive amount of investments thanks mainly to its economic recovery, targeted supporting policies and improving business environment, which has improved the market expectations of foreign investors.
Since the Belt and Road Initiative was proposed, China has further widened the opening up of its port cities, border cooperation zones and cross-border cooperation zones in the western regions, and it has developed cities such as Xi’an, Chengdu and Chongqing as hubs for expanded opening-up.
The potential of western regions in big data, electronic information, artificial intelligence, new energy, biomedicine and distinctive tourism industries have been steadily unleashed.
According to a catalogue revised and released at the end of 2020 for encouraging foreign investment, eligible foreign-funded enterprises in the western regions can enjoy a reduced corporate income tax rate of 15 percent, tax exemption on imported equipment for self-use, and preferential land supply for intensive land projects.
The policies have enhanced the appeal of western regions for new industrial investments, and the confidence of foreign investors. With the improving infrastructure and business environment, the growth potential of the western regions can be further unleashed, bringing benefits to foreign enterprises.
In the January-April period, the actual use of foreign investment in the eastern, central and western regions increased by 39.1 percent, 37.5 percent and 30.3 percent, respectively. The authorities will make FDI use between different regions more even. In recent years, China has improved cooperation with countries involved in the Belt and Road Initiative, attracting more enterprises from the participating countries to invest in China.
The members of the Regional Comprehensive Economic Partnership will also enjoy more transparent investment policies, eased access, and unified rules of origin, customs procedures, inspection and quarantine, and technical standards in the Chinese market.
China has also closely cooperated with the Association of Southeast Asian Nations members on investment. It also completed negotiations with the European Union on a bilateral investment agreement which is awaiting ratification.
In January-April, the actual FDI of countries involved in the Belt and Road Initiative, Association of Southeast Asian Nations and the European Union in China increased by 62.8 percent, 65.2 percent, and 9.2 percent year-on-year respectively.
The resurgence of the virus in some countries and regions has, however, affected cross-border personnel flows and investment promotion. Enterprises still face difficulties such as insufficient orders, blocked logistics and unstable supply chains.
With mounting uncertainties, FDI growth in the second half of this year faces great pressure. However, China’s economic growth momentum will remain stable. Its huge domestic demand, supporting industries, talents and infrastructure, improving business environment and favorable policies will continue to boost the expectations and confidence of foreign investors and ensure steady FDI growth this year.
During the 14th Five-Year Plan period (2021-25), China will accelerate the development of the dual circulation paradigm, where domestic and foreign markets boost each other with domestic market as the mainstay, and introduce more opening-up measures. It will remain a magnet for FDI as many foreignfunded enterprises remain confident of its post-epidemic economic performances.
High-tech industries including new energy vehicles, biomedicine and smart manufacturing, as well as services industries such as medical and health, education and training, and cultural tourism sectors are expected to become major areas for investment.
The author is deputy director of the Foreign Investment Institute at the Chinese Academy of International Trade and Economic Cooperation of the Ministry of Commerce. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.