The Economic Repercussions of China’s Waning Investor Attraction

Most companies have shifted their investments that were originally planned for China to other markets that are said to be more stable and transparent

The size of China’s economy is an irresistible magnet for foreign investors which includes the sovereign wealth from the Gulf, contemplating larger allocations to the country. The giant economy of China generates over $10 trillion annually and has consistently left the growth rates of western counterparts behind including the US. 

Although the recent trends presented a shift in sentiments amazon many foreign investors particularly those operating within China. Once seen as a top region for major investments, China faces a fading allure. This instils concerns about internal support for domestic companies and declining profitability for foreign ones.

This resulted in the foreign investment increasingly moving towards selected services sectors leaving China’s manufacturing industry, once the engine of its economic miracle, struggling to attract new entrants.

A recent European Chamber of Commerce poll shows a grim picture of international business confidence in China. According to the 2024 Business Confidence Survey, the percentage of companies considering China as a top investment destination has reached all-time lows: 15% for current investments and only 12% for the future.

Most companies have shifted their investments that were originally planned for China to other markets that are said to be more stable and transparent. The foreign subsidiaries in the country which wish to expand face difficulties to get their headquarters on board. 

At present China is ranked at number 14 which was up from 21 from their previous year. Among other countries with a population of 20 million or more, the country ranks at the fourth most competitive economy. In terms of attracting foreign investors, China fell seven places to 11th. Despite the largest economy, the country does not sway investors. 

As per UN data, the total FDI into China dropped $25 billion in the year 2023 to $163 billion. The total net inflows amounted to $681 billion as per Un from 2019 to 2023. That may sound remarkable, but it pales in contrast to the entire amount of foreign corporate investment in the country. During the same time span, the value increased to $1.89 trillion.

The increase can either mean that the value of the installed base of investments shot up high or most of the foreign expansion in China was funded by foreign companies that already existed in the country. In either of the situations the figures can bring in doubts on ability to widen its appeal to China’s new foreign entrants. 

Known as the “workshop of the world” which makes the country’s manufacturing FDI decline particularly striking. 

Most of the foreign investments are deviating towards the service sector instead. Remarkably, every year since 2010, the total value of realized FDI in Chinese services has exceeded that of the country’s factories.

While manufacturing accounted for 26.3% of total realized FDI into China in 2022, IT accounted for 12.6%, research and development services accounted for 16%, and leasing and business services accounted for 17.5%. In 2022, $131 billion was invested in foreign services, resulting in the formation of more than 33,000 new service sector enterprises owned by foreigners.

The following outcomes do not align with Beijing’s aim to promote manufacturing services over other services. They instead focus on high tech and strategic industries in order to boost economic growth and self sufficiency. Foreign investors continue to focus on the service sectors despite the government’s emphasis on boosting manufacturing. 

From 2014 to 2017, international industrial enterprises’ profits increased in lockstep with their Chinese counterparts. Then, up to the pandemic in 2020, foreign firm profits plateaued while Chinese industrial enterprises’ earnings rose, resulting in a performance disparity.

While China’s economy is still a global superpower, its declining allure to international investors, particularly in manufacturing, indicates underlying worries about market predictability and fairness. As international investors consider their options, the country may need to rethink its policies in order to keep its position as a top global investment destination.