Foreign investment in China falls for past year as economy struggles

Austin, Texas — Foreign Direct Investment (FDI) in China fell for the 12th consecutive month in May, according to data released by China’s Ministry of Commerce.   

The ministry in a June 21 press release said in the first five months of this year, China’s economy attracted $56.8 billion (RMB 412.51 billion) in FDI, a year-on-year decrease of 28.2%. 

Analysts and foreign investors attribute the drop to political risks and China’s struggle to recover stable economic growth since the COVID pandemic.   

Jeffrey — a senior Chinese venture capitalist operating investment funds in China since 2008 — who cannot use his full name or affiliation as he was speaking without his company's authorization, told VOA the boom in China’s venture capital industry has passed.   

"China's economic growth rate has no room to accommodate a large amount of foreign investment," he said.    

China’s Gross Domestic Product (GDP) annual growth was 6 to 7% in the five years leading up to the 2020 pandemic, when the economy recorded its weakest growth in four decades. 

Exports boosted China's GDP growth by 8% in 2021 but it then dropped to 3% in 2022 and 5.2% in 2023 as the property sector, employment, and incomes slumped. The World Bank projects growth to drop to 4.8% in 2024, 4.1% in 2025, and 4% in 2026.  

Frank Liu, a Chinese businessman living in China who works in cross-border investment between the United States and China but does not want his company to be identified due to concerns about repercussions for himself or his company, told VOA, "Foreign investors, especially Americans, have a different style from domestic Chinese investors. They like long-term investment, so they attach great importance to the stability of your (government's) policies." 

China has cracked down on several industries in recent years to ensure adherence to the government line on political and social issues, including tutoring, entertainment, and online games, causing financial losses to companies and discouraging foreign investment.   

Crackdowns on some foreign companies have also raised concerns. 

Chinese authorities in March 2023 detained five Chinese employees of the Beijing office of Mintz Group, a U.S. due diligence company, on suspicion of illegal operations. In August, authorities questioned employees at the Shanghai branch of Bain & Company, a U.S. management consulting company. There have also been detentions of employees at British and Japanese companies in China.   

Paul Orlando, an adjunct professor at the Lloyd Greif Center for Entrepreneurial Studies at the University of Southern California School of Business, told VOA that many American technology companies and investors have withdrawn from China. 

In emailed responses to VOA, he said, "There's an inability to ignore supply chain risks (brought to mind during COVID), and an inability to ignore political risks. These qualities were present some years ago, but the political changes and multiple examples of China's reach to influence domestic politics elsewhere has received more attention." 

A declassified U.S. intelligence threat assessment released in February warned of Beijing’s “higher degree of sophistication in its influence activity,” including by using generative artificial intelligence (AI). The report warned of “growing efforts to actively exploit perceived U.S. societal divisions” online. 

"Rather than a large market to enter, more people began to see China as a place where they would never get a fair shot at success or a place that was even actively working against them," said Orlando.   

He said this mindset is also influenced by greater concerns about intellectual property protection, industrial espionage, and knowledge of worsening rights in Xinjiang and Hong Kong. 

"The experience of the COVID period was too extreme. Investing in China even if you did live there or travel there frequently was difficult enough. Without living there or really spending time there it's even more difficult to know what you're investing in," Orlando added. 

Chinese Premier Li Qiang invited American and other foreign companies to invest in China when meeting with a delegation led by Suzanne Clark, president of the American Chamber of Commerce, on February 28 and called on Washington not to adopt a policy of decoupling from China. 

China has also vigorously promoted a visa-free policy and increased international flights to boost exchanges between Western countries and the Chinese people. But investors and analysts say more and more foreigners, especially in American investment circles, are leaving China. 

William Reinsch, the Scholl Chair in International Business at the Center for Strategic and International Studies, said in an email to VOA, "Despite China's statements that Western investment is welcome, actions by the Ministry of State Security like raiding Western company offices and detaining employees send a more powerful signal than anything the government says." 

Fears of a worsening trade war with China may also be keeping some investors at bay.  

The U.S. announced in May it would increase tariffs on Chinese electric vehicles and other products Washington says are unfairly subsidized by Beijing, and the EU and Canada followed suit. China warned it might respond with temporary anti-dumping tariffs on EU pork. 

The U.S. Treasury Department issued a "Notice of Proposed Rulemaking" on June 21 to restrict and monitor U.S. investment in China's development of AI, computer chips and quantum computing. China responded that it reserved the right to take corresponding measures. 

While there seems to be no improvement in relations between China and Western countries, senior Chinese venture capitalist Jeffrey said he was "not as pessimistic as public opinion" about foreign investment in China. 

He believes that FDI will perk up if the Chinese economy can recover.

Adrianna Zhang  contributed to this report.