Lately, there have been wild reports that large numbers of foreign enterprises have been withdrawing capital from China, but the facts say otherwise. Erroneous reports like these create misunderstandings, disturbing China’s market operation and policy-making. In fact, China is still an ideal destination for foreign investment, which can be seen from at least three aspects.

First, foreign direct investment, which accounts for the largest proportion of foreign capital usage domestically, is still increasing. Currently, China mainly attracts three categories of foreign investment: foreign direct investment, portfolio investment and other investment. Foreign direct investment, accounting for over 95 percent of the total, seeks long-term returns. The other two categories are speculative forms of indirect investment that seek quick returns, and their proportion is relatively small. 

According to statistics from China’s Ministry of Commerce, from 2010 to 2015, the direct investment grew steadily from nearly $106 billion to more than $126 billion. In 2016, China’s actual use of foreign investment was $126 billion while there were 27,000 newly established foreign-funded enterprises. This clearly shows that China’s economy has been growing and so has the direct foreign capital inflow.

Second, countries and regions that are the major source of China’s foreign capital still have passion for investing in the country. The statistics from the ministry also show that in recent years, investment from major  capital source countries and regions has remained relatively stable and accounts for 90 percent of China’s total foreign investment.

These countries and regions include Singapore, Republic of Korea, Japan, the United States, Germany, Britain, France as well as Chinese Hong Kong, Macao and Taiwan. During the 12th Five-Year Plan period (2011-2015), their capital invested in China grew from more than $106 billion to $118.6 billion.

Lastly, judging by global capital flow, China is still among the top investment destinations. According to statistics from the UN Conference on Trade and Development, in 2012-2015, global capital flowing into China steadily grew from more than $121 billion to $135.6 billion. Compared to Southeast Asia, another hot investment destination, the growth rate of inflow capital in China is higher; while compared with developed countries, China’s inflow of foreign capital is more stable and sustainable.

In conclusion, China still appeals to foreign investors. Entering the new normal, China’s economic development presents new characteristics: economic growth is driven more by innovation than by production factors, so it is less dependent on investment and export; industrial restructuring and transformation from traditional manufacturing to high-end manufacturing as well as the service industry is accelerating; and policies, especially those pertaining to foreign investment and trade, are also being adjusted.

China’s economic upgrading will surely lead to changes in the structure of foreign capital: Some low-end capital will flow out and more medium-to-high-end capital will flow in.

Nevertheless, we should be aware that as the world economy undergoes dramatic adjustments, new situations and changes will inevitably impact foreign capital flow. For one thing, the global economic downturn will influence the global flow of direct investment as a whole, which cannot be eliminated in the short run. For another, trade protectionism is now rising in the world, influencing capital flow. Lastly, discrepancies in economic policies between developed and developing countries have led to the redirection of capital to developing countries.
 

 

The aforementioned factors bring challenges to the ability of the Chinese and global economy to attract foreign capital and develop foreign trade. We should actively engage in global economic governance and promote globalization to foster a good environment for foreign enterprises and to bring benefits to other nations.

 

Luo Changyuan is a professor and deputy director of the Institute of World Economy at Fudan University.