Analysis: Will foreign investors remain interested in China?

Editor’s note: Wang Dan is chief economist at Hang Seng Bank China. The article reflects the views of the author and not necessarily those of CGTN.

New data from the Ministry of Commerce shows that foreign direct investment (FDI) in China rose 17.6 percent year-on-year in January to $15.84 billion.

We expect the momentum to continue, but not without fluctuations.

After all, the market is facing one of the greatest uncertainties in a decade, due to the Federal Reserve announcing several potential interest rate hikes in the coming months. If these promises materialize, capital could flow out of emerging economies and back to the United States. In addition, China-US relations could face further strain as both sides prepare for a political shift later this year.

Geopolitical tensions aside, the Chinese economy is fundamentally sound. Since the onset of the COVID-19 pandemic in early 2020, supply chain disruption in China has been minimal compared to other industrial economies, largely due to tight epidemic control. This stands in stark contrast to the frequent plant closures in other countries.

The American electric car manufacturer Tesla is a perfect example. Tesla factories in Germany and the United States have suffered constant delays over the past two years, while its Gigafactory in Shanghai has doubled production. Even if the pandemic ends this year, fully restoring supply chains in any country may take one to two years or even longer. Meanwhile, more investment is expected to flow into China for secure supply at a reasonable cost.

China’s stable growth outlook and macroeconomic environment has been the main draw for global investors. People feared that production would leave China, but in fact the opposite happened: the interest of foreign investors in the Chinese market increased. In 2021, about a fifth of global investment came to China, doubling its share from the pre-COVID era. Global investors are betting on China’s economic future.

The business world is capable of dealing with economic cycles and geopolitical uncertainties. What is hard to find is a stable macroeconomic situation, as well as a government committed to improving the business environment.

China is well placed to provide both. China’s domestic market has become the most important destination in the strategic layout of multinational enterprises. Indeed, foreign investors had some of their best years after the onset of the COVID-19 pandemic.

In 2021, the total industrial profit of foreign enterprises in China increased by more than 25%, exceeding 2 trillion yuan, a record high. This is partly due to strong export demand and partly to China’s efforts to modernize its industrial structure.

The consumer sector, which has long been a favorite area for foreign investors, has received an additional boost from e-commerce. Industry supply chains of new energy vehicles, new materials and advanced equipment are strongly emerging. Finally, the service, IT and high technology sectors are also the subject of increasing attention from foreign investors.

However, we do not foresee any drastic measures to be taken in 2022 to attract foreign investment. Some of the encouraging trends have already taken place. The Regional Comprehensive Economic Partnership (RCEP), the world’s largest free trade agreement, which entered into force on Jan. 1, will benefit China in attracting more investment from ASEAN countries and other developed countries. from Asia.

Beyond that, policymakers are likely to adopt a more targeted approach. China’s welcoming attitude towards foreign investment will not change, but capital flows should be in line with national strategies for developing high-tech fields, strengthening supply chains and facilitating emission reduction missions. of carbon.

China does not want a “disorderly expansion of capital”, which refers to both domestic and foreign capital. For example, China does not want more capital flowing into the commercial real estate sector, but wants more into the low-cost or affordable housing sectors. China is hesitant to see more capital in platforms that rely solely on selling cheap products, but would rather venture into technologies such as AI, 5G and blockchain.

In the early years after China joined the World Trade Organization in 2001, foreign investors came to China for cheap labor and land. However, these advantages began to fade a decade ago, and then China gradually became the world’s largest single market with a large middle class and high-quality infrastructure. This means that foreign investors are more likely to make long-term investments targeting domestic consumers and producers.

With the sheer size of the market, the average cost of R&D is also lowered. The number of multinational enterprises establishing R&D centers in China has increased rapidly in recent years. Tesla is building an R&D center in Shanghai, its first outside the United States.

When the pandemic is over, the global supply chain will resume the trend of regionalization where countries try to secure certain supplies in strategic sectors to avoid over-reliance on China. Yet, given China’s market potential, as well as its reliable production capacity, China is likely to remain a major draw for global investors.

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