The Benefits of Stabilizing Foreign Investment in China

24 Aug 2023

The Chinese government has once again emphasized its commitment to foreign investment. Recently, the State Council outlined 24 policy measures in its Opinion on Further Optimizing the Environment for Foreign Investment and Enhancing Efforts to Attract Foreign Investment. These measures cover a range of areas including improving the quality of foreign capital utilization, ensuring national treatment for foreign-invested enterprises, continuously strengthening the protection of foreign investments, enhancing the convenience of investment operations and intensifying fiscal and tax support. The content is comprehensive. This year, direct foreign investment in China has significantly declined. The opinion is a proactive response to the concerns of foreign enterprises. If effectively implemented, this document will undoubtedly help alleviate the concerns of foreign investors and stabilize expectations to ensure a steady influx of foreign capital.

The significance of foreign investment to China’s economy goes without saying. A few years ago, the Chinese government included stabilizing foreign investment among its “six stabilization” priorities. The opinion further emphasizes “greater efforts and more effective ways to attract and utilize foreign investment.” The Chinese government’s emphasis on attracting and utilizing foreign investment is rooted in pressing realities. For over a decade, China’s economic growth has come under pressure. It took a severe hit during the three-year pandemic. While efforts are being made to get it back on track, the recovery has lagged behind expectations. A concerning sign is evident: amid complicated domestic and international factors, there’s an apparent trend toward economic and social introspection within China. This trend is decidedly detrimental to deepening reforms, opening up, and pursuing high-quality development.

One consequence of this inwardness is that stabilizing foreign investment has become increasingly difficult. According to statistics from the State Administration of Foreign Exchange, foreign direct investment (FDI) in China under the international balance of payments standard plummeted 83% year-on-year in the first half of 2023. In the second quarter alone, it was $4.9 billion, a year-on-year decline of 89.7%. Data from the Ministry of Commerce show that China’s actual use of foreign investment declined 2.7% year-on-year in the first half. Some analysts believe that differences in statistical calibrations account for the discrepancies in these figures. Additionally, against the backdrop of tighter U.S. monetary policy, FDI in countries and regions outside of China is also showing a cyclical downturn. This analysis has merit. While short-term fluctuations in foreign investment data should be viewed rationally, the downward trend still calls for vigilance and proactive measures. After all, although the magnitude of the declines varies, both sets of data are on a downward trajectory. The FDI data in the balance of payments provides a more comprehensive and accurate view than the Ministry of Commerce’s figures because they take into account the withdrawal of foreign capital. Undoubtedly, the situation is grave. The release of the opinion at this time underscores the urgency that policymakers feel is needed to boost foreign investment.

Faced with the declining trend in foreign investment, it’s important to distinguish between what can and cannot be done. China has no say over external factors such as the U.S. dollar interest rate hikes. Instead, it should focus on what it can control. If we simply attribute the decline in foreign investment to external factors and statistical differences or dismiss it as “normal fluctuations,” there’s a risk of adopting a do-nothing attitude, which not only fails to address the issue but also allows the situation to worsen. Governments at all levels should view the decline in foreign investment from the perspective of sustainable economic development and even national security.

To gauge how well China is attracting foreign investment, the firsthand experiences of foreign companies operating in China should be prioritized. Recently, the chambers of commerce from Europe, the U.S., and Japan noted that the opinion addresses and attempts to resolve many of the concerns previously raised by foreign companies, including fair competition, tax incentives, cross-border data transfer, and support for research and development. However, the crux is in its implementation. “We are surprised that most of our concerns have been addressed, but if not implemented, it’s meaningless,” the Japan Chamber of Commerce in China commented. This may be a hard pill to swallow, but it’s the truth.

While the opinion is visionary, given the urgency of the situation, it could begin by addressing certain specific yet highly-focused issues to quickly showcase the sincerity of the Chinese government and stabilize the expectations of foreign businesses.

One such issue is visas. Reportedly, before the pandemic, Japanese citizens could enter China without a visa for up to 15 days. This was suspended due to pandemic control measures, and now it takes over five weeks from visa application to processed. The opinion calls for ongoing optimization of immigration policies, offering entry and residence conveniences for foreign executives, technical personnel and their families investing in China. Related to visa issues is the quick resumption of international flights, which necessitates coordination across multiple Chinese government departments and active consultations with foreign entities.

Another is the issue of cross-border data transfer. Foreign investors generally believe China’s current data management to be overly strict. This issue cannot be sidestepped, especially as China seeks to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The opinion proposes the establishment of a fast track for qualifying foreign investment enterprises to efficiently conduct safety assessments of critical data and personal information for overseas transfer, thereby promoting orderly and secure data flow. The opinion also supports pilot programs in areas like Beijing, Tianjin, Shanghai, and the Guangdong-Hong Kong-Macao Greater Bay Area. Resolving the cross-border data transfer issue requires a balance between economic freedom and national security. Fundamentally, without economic prosperity, national security becomes moot.

It is undeniable that international relations and geopolitics influence the effectiveness of attracting and utilizing foreign investment, a sentiment that’s particularly evident in the current U.S.-China relationship. The head of the China-U.S. Chamber of Commerce noted that an aspect requiring greater attention, which is currently under-discussed, is China’s overall “sentimental tone” toward the U.S. He indicated that no company wishes to invest in a market where it doesn’t feel welcome. Therefore, the chamber’s members continuously list the strained Sino-U.S. relationship as a primary concern. Lately, there have been increased high-level official visits between the two countries, signaling positivity regarding bilateral exchanges. Many often liken economic and trade relations to the “ballast” of U.S.-China ties, but evidently, this is predicated on the soundness of the ship itself.

At the outset of its reform era, China faced a severe capital shortage and was eager for foreign investments. Some either fail to realize or have forgotten that China’s leading position in global foreign investment took generations of effort to attain. Nowadays, driving high-quality development and building an innovative nation cannot proceed without foreign capital involvement. To thwart attempts to “decouple and break the chain,” China also needs to foster good relations with foreign investors. We hope that with the introduction of this opinion and adhering to the principle of competitive neutrality, all enterprises, including foreign-funded ones, will be treated equally, effectively reversing the trend of economic and societal introversion. With this in place, foreign investment will naturally stabilize without expressly seeking stability.