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CLAIM OF SLOWING FDI REFLECTS STATISTICAL BIAS




By Zhang Monan | China Daily | Updated: 2024-03-13 07:57
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JIN DING/CHINA DAILY

Of late, there has been a lot of talk about large-scale disinvestment by foreign
companies in China. In the face of the complex international environment, it's
crucial to objectively assess the situation and take necessary measures to
attract foreign investment to China.

Data from the State Administration of Foreign Exchange show China's direct
investment liabilities in its balance of payments stood at $33 billion last
year, the lowest since records for quarterly outflow began in 1998. However,
data from the Ministry of Commerce show that in 2023, the number of newly
established foreign-invested enterprises nationwide increased by 39.7 percent
year-on-year, with the actual use of foreign investment amounting to 1.14
trillion yuan ($158.65 billion), a historical high despite a decline of 8.0
percent year-on-year.

The two sets of data show significant differences. The Ministry of Commerce data
on foreign direct investment (FDI) is more internationally comparable. The
United Nations Conference on Trade and Development keeps the records of direct
investment in different countries and publishes the World Investment Report
every year which analyzes the annual global direct investment data and trends.
The UNCTAD data on China's inbound direct investment comes from the Ministry of
Commerce, so the UNCTAD figures would better reflect the overall changes and
trends.

In fact, the decline in FDI inflows, which began in 2023, is a global
phenomenon. In recent years, factors such as anti-globalization, protectionism,
major countries' "reshoring" moves, geopolitical conflicts, the COVID-19
pandemic and the US Federal Reserve's interest rate hikes have accelerated the
diversification, regionalization, "nearshoring" and "friend-shoring" of global
industrial, supply and value chains, which has had a huge impact on global trade
and international division of labor.

In particular, the "tide-of-the-US-dollar" effect caused by the Fed's interest
rate hikes over the past two years has curbed the inflow of capital in emerging
economies. The UNCTAD data show that the net FDI inflow in Mexico and India
turned negative in the first three quarters of 2023, similar to the situation in
China.

According to the latest data from the Organisation for Economic Co-operation and
Development, in the first half of 2023, the global net FDI inflow fell by 30
percent year-on-year. Among developed economies, France, Germany, Japan and some
other countries saw a decline of up to 60 percent year-on-year in the cumulative
net FDI inflow in the first three quarters of 2023. According to OECD
statistics, the net FDI inflow in the European Union fell by 86 percent in the
first half of 2023 compared with the same period in 2022, while China saw an 80
percent year-on-year decline.

The decline in the use of foreign investment under the balance of payments
framework should not be misinterpreted as foreign disinvestment, because of two
reasons. First, the decrease in the profits of foreign industrial enterprises
leads to reduced re-investment of profit. Second, the decline is related to the
changes in the exchange rate differentials.

Over the past two years, the significant interest rate hikes by the Fed have led
to a further inversion of the interest rate differential between China and the
United States, a factor which must be taken into consideration before arriving
at a relatively objective conclusion.

China's use of foreign capital in 2024 is likely to be more complex, and the
task of stabilizing foreign investment remains arduous. But overall, the
opportunities outweigh the challenges, and given the many favorable conditions,
China is likely to attract and utilize more FDI in 2024.

China's sustained and stable recovery is the basis for attracting more FDI. Due
to favorable factors such as optimization of macro-economic policies, sustained
momentum in the manufacturing industry, and consumption recovery, several
international organizations or institutions have forecast that China's GDP
growth will be between 4.5-4.8 percent in 2024. However, China set a growth
target of around 5 percent for its economy in 2024, which means it will continue
to contribute handsomely to global economic growth. Plus, foreign-funded
enterprises are confident about the prospects of the Chinese economy's
high-quality development.

Besides, China is expected to issue a series of policy measures to further
improve the business environment and promote high-level opening-up. At the end
of last year, the State Council, China's Cabinet, issued the "Opinions on
Further Optimizing the Business Environment to Increase Attractiveness to
Foreign Investment". The document provides detailed guidelines and planning,
including promotion of enterprise operations, and fiscal and tax support, and
proposes to gradually ease market access for foreign investment, ensure
foreign-invested enterprises participate in government procurement activities in
accordance with the law, and establish and improve the system of roundtable
conferences for foreign-invested enterprises.

Also, the pace of aligning Chinese laws and rules with global economic and trade
laws and rules continues to accelerate. Last year, the State Council issued a
document to facilitate institutional opening-up, which is aimed at aligning
Chinese and international rules in areas such as competition policy,
intellectual property rights protection, cross-border data transmission, and
environmental standards, and will create a regulatory environment in line with
global standards for global capital.

Judging from the above factors, the inflow of FDI into China, especially in its
high-tech manufacturing sector, is expected to usher in a new round of
higher-level growth in 2024, and China's absorption and utilization of foreign
capital will enter a new stage of high-quality development.

The author is deputy director of the Institute of American and European Studies,
China Center for International Economic Exchanges.The views don't necessarily
reflect those of China Daily.

If you have a specific expertise, or would like to share your thought about our
stories, then send us your writings at opinion@chinadaily.com.cn, and
comment@chinadaily.com.cn.



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