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Has China finally lost its appeal to investors?

5 Mins read

Has China finally lost its appeal to investors?

As far as investors are concerned, China has been the undisputed king of Asia-Pacific for decades. However, some signs point towards the country losing its appeal.

Since the late 1970s, China has worked hard to both transform its economy and boost its world status. Economic reforms and large infrastructure changes were pushed through, allowing China to offer an abundance of manufacturing and services opportunities to investors. By the 1990s, China had achieved unrivalled industrial growth and garnered a reputation as the ‘world’s factory’. International companies were quick to take advantage and set up operations with much lower costs than were on offer anywhere in the Western world.

With the world’s largest population at its disposal, China was also able to offer investors a cheap labour force with diverse skillsets, a key attribute for companies seeking large-scale manufacturing investments. China’s economy continued to thrive and experienced little competition from neighbouring countries for several decades. In recent years, however, political disputes and ongoing sanctions have seen international companies wary of investing in China, and the country has witnessed a decline in foreign direct investment (FDI).

India overtakes China as the leading country for FDI in Asia-Pacific


According to data from GlobalData’s FDI Projects Database, China was the leading destination for FDI into Asia-Pacific in 2019. Over the 12 months, it brought in 854 projects, representing almost one-fifth (19.8%) of all inward FDI in the region, ahead of India and Australia, which had 834 and 437 projects, respectively.

In 2020, following sanctions imposed on China by the US amid human rights concerns, the Covid-19 pandemic and continued territorial disputes in the East China Sea, FDI into the country declined sharply. China-bound FDI dropped by 53% to 401 in 2020, against a global average of -17.5%. The US remained the top source country for FDI into China, but investment from the country dropped from 205 projects in 2019 to 97 in 2020.

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In 2020, India also took the lead as the destination country of choice for FDI in Asia-Pacific, recording 562 projects, 40.1% more than China. By 2021, despite witnessing an increase in FDI, with project numbers rising to 481, China slipped to third position when it came to FDI projects coming into Asia-Pacific, behind India with 713 projects and Australia with 511.

China’s leading source FDI markets drop their investments


The US remained the largest foreign investor into China for the third consecutive year in 2021, recording 169 projects. This represented an increase of 74.2% from 2020 levels, but still some way short of the pre-Covid 2019 figure of 205 projects.

Germany, the second-largest foreign investor in China, has greatly reduced its investment in the country from 112 projects in 2019 to 60 in 2020, and to 51 in 2021. The UK, which places third for investment projects across this three-year period, also saw its investment decrease by nearly half, from 73 in 2019 to 38 in 2021. Japan also saw its China-bound FDI decrease from 61 projects in 2019 to 40 projects in 2020, and then 25 in 2021.

It is, however, Taiwan that best demonstrates this drop in interest in China as an investment destination. In 2019, China was the number one country for Taiwanese outbound FDI with 19 projects, ahead of the US (14), India (13) and Vietnam (12). By 2020, Taiwanese investment into India had increased with 20 projects recorded, ahead of Vietnam in second (13 projects) and the US in third with 12. China attracted a mere three projects, putting it in ninth position. This figure was to drop even further in 2021, with companies from Taiwan investing in only two projects in China, with the US, Germany and India the most popular destination markets.

Overall, with the exception of Hong Kong and Switzerland, China’s top ten FDI source countries dropped their investments in the country over the three years from 2019 to 2021, with the likes of India, South Korea, Singapore and Vietnam rising in popularity at its expense.

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Japan-based multinational SoftBank is one company that has notably moved away from investments in China. The provider of investment management services chose to reduce its outward investment in China in 2021, recording only one project, compared with ten in 2019. The company decided to adopt a cautious approach towards investment in China after local regulatory authorities imposed strict antitrust laws and penalised a large number of tech companies for violation of laws and abuse of market power. As a result, SoftBank diversified its investments and increased its investment in other countries including South Korea, Germany, the UK and Israel.


Does manufacturing still drive FDI in China?

Historically, China’s economy has been reliant on few industries, with tourism, electronics, business and professional services, software and chemicals accounting for 45.6% of its total inward FDI between 2019 and 2021. Although China is the largest global exporter of electronics, in FDI terms it was tourism that ranked first between 2019 and 2021, recording 211 projects ahead of electronics with 185.

Somewhat predictably, manufacturing was the key business function in China in this three-year period with 469 projects (representing a 27% market share). Sales, administration and marketing operations ranked in second with 372 projects while construction placed third with 236.

On a regional level, China’s key city destinations for FDI also felt the impact of a turndown in investment. Shanghai, the most populous city in China and a global financial services hub, saw FDI projects more than half from 241 in 2019 to 109 in 2021. Likewise, Beijing saw inward investment drop by 63.5% from 2019 to record only 27 projects in 2021, while FDI projects into Shenzhen dropped from 60 in 2019 to 25 in 2021.


China’s economy in decline after reaching a peak

According to the World Bank, China’s GDP growth is expected to grow at a slower rate of 2.8% in 2022, down from 8.1% in 2021. Meanwhile other Asia-Pacific countries such as Vietnam, India and Malaysia are anticipated to grow at a healthy compound annual growth rate of 7.5%, 6.5% and 6.4%, respectively, in 2022.

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In recent years, foreign investors have been diverting funds to these emerging economies, resulting in surge in FDI for them. India, Malaysia and Vietnam had recorded more FDI projects in late October 2022 than they had for the full-year 2021.

Aside from slowing economic growth there are multiple domestic and external factors that are hampering inward investment in China. The zero-Covid policy adopted by the Chinese government has resulted in several severe lockdowns and slowed economic growth in major economic and financial hubs across China. The country’s real estate turndown coupled with increased antitrust laws for technology companies have further exacerbated investor confidence and worsened economic opportunities in the country.

China’s relationship with Russia causes unease

China has been the largest trading partner of Russia for more than a decade, which is perhaps the reason for its ambiguous stance on the war on Ukraine. China’s reluctance to condemn the Russian invasion has resulted in condemnation from many Western nations. There is a simmering fear that Chinese authorities may also announce a military campaign against Taiwan, a possibility that could be putting off would-be investors into the country, who are wary of the difficulties many companies active in Russia have had pulling out of the country since the Ukraine invasion.

China is no stranger to making controversial decisions, and should it be ostracised, it has a high level of self-reliance that is out of reach for almost every other country in the world. China’s huge population, diverse landscape and innovative mindset have allowed it to transform its economy and become one of the most influential countries in the world.

However, when it comes to China, a slowing economy and geopolitical uncertainty will continue to deter international investors, who are already displaying more caution in the country. China has not had to worry about competition from its neighbours when it comes to investment until quite recently, but it will have to adapt quickly if it wants stay in favour with investors who are increasingly being tempted by the likes of Vietnam and Malaysia.

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