With borders still all but closed, foreign direct investment (FDI) into China has slumped to its lowest level in years. In the 2010s, it attracted on average 474 new greenfield projects in the first half of each year, worth $35.3bn. In the first six months of 2022, 110 projects worth a total of $6.2bn were announced, according to data from fDi Markets.
Beyond Xi Jinping’s draconian approach to stamping out Covid-19, there is a widespread and growing sense that it is no longer a great or even safe place to invest.
“For over a decade, China was consistently the largest recipient of FDI,” said Stephen Roach, an economist and former chairman of Morgan Stanley Asia. “It was integral to the country’s growth strategy. But China has turned less hospitable to foreign multinationals, just as other options for investment dollars such as Vietnam became available.”
Government data show FDI into the country rising 17.3% year-on-year in the first seven months of the year, to $88bn. But even if notoriously unreliable state data can be trusted, the reality is that much of that is “round-tripped” by domestic funds routing capital back into the mainland via Hong Kong. The former British colony was the source of 76% of all FDI in 2021.
Alicia Garcia-Herrero, chief Asia economist at Natixis, said the Chinese government was keen to trumpet new big-ticket FDI projects because it was aware of low productivity rates, a looming demographic crisis and a deep fear “that global investment chains are being reshuffled — and not in its favour”.
‘HOLLOWING OUT’
Analysts said that ignored the fact that much of the investment it did attract was sourced from a tiny handful of multinationals. Just four German firms, including Volkswagen and BMW, accounted for 34% of all European FDI into China by value from 2018 to 2021.
Logan Wright, head of China markets research at Rhodium Group, said that narrow focus was unhealthy. He pointed to a “huge hollowing out of smaller firms investing in China, which is behind a significant decline in greenfield investments from around the world. Our data points to a sharp slowdown in inbound FDI in 2022.”
Even large corporates are exiting, blaming rising costs and wrangles with investors. In July 2022, the CEO of Stellantis, Carlos Tavares, blamed a “breach of trust” on a decision to shutter a joint venture with local partner Guangzhou Automobile Group. He warned of “growing political interference in the way we do business as a Western company in China”.
Tavares said the “interference of the political agenda has been increasing by the day”, adding that rival carmakers with plants in the country could even lose them if the world “fragments” and China becomes embroiled in a sanctions stand-off with Western nations.