Development of FDI inflows to ChinaInternationally, China is still a country with comparatively low FDI openness. High restrictions and growing competition from domestic companies were main factors contributing to low FDI growth rates and decreasing greenfield investment since 2011. To improve the investment environment, the Chinese government issued a new Foreign Investment Law, which came into force in January 2020. The new law seeks to protect the interests of international investors, mainly by prohibiting forced technology transfer, protecting intellectual property rights, and promoting equal treatment. The number of sectors open to foreign investment have also been further increased in two “negative lists” published in June 2020 and a list of encouraged industries for foreign investment. In addition, several new Special Economic Zones have been set up, trying to attract foreign investors with further incentives.
Origins of FDI inflows and invested sectorsOne special aspect about FDI in China is that a large part of the money is coming through Hong Kong into the country, accounting for more than 50 percent of the total capital stock in 2021. Most of that money is conduit FDI, flowing through Hong Kong in its function as a financial hub, but originating from investors located in other countries. According to UNCTAD estimates for 2020, only around 10.4 percent of China’s FDI stock originated from investors in Hong Kong, while another 10.4 percent came from the U.S., and 12.1 percent from China itself – from Chinese companies not registered on the mainland. In terms of invested industries, foreign investment in China is traditionally strong in the manufacturing sector. However, manufacturing has been gradually losing ground over the last 15 years, while the service sector has been quickly gaining significance, with industries such as IT and leasing and business services.
For the future development of FDI in the country, China’s determination to further open its economy and the impact of geopolitical tensions on global FDI flows are the two main factors that will determine whether China’s huge potential in foreign investment can be further unlocked.