China has been performing well economically over the years, despite their policy restrictions, however some experts say that investors should expect slower growth in 2023. While some foreign investors have grown wary of investing in China, the news of the re-opening has been welcomed by the international business community. In an effort to combat investor wariness and promote economic recovery, the Chinese government has announced its plans to make its economy more open to foreign direct investments. This article will discuss the reasons why China as a country remains a highly attractive option for foreign investment in the year ahead.
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FDI in China: A Look at FDI Over the Past Year
Foreign Direct Investments (FDI) in China grew by 14.4% year-on-year, generating more than RMB 1.09 trillion (USD 168.34 billion) for the first 10 months of 2022. The sectors that received the highest amount of interest and attention from foreign investors were the high-tech and manufacturing industries, with the former seeing a growth of 31.7%. Moreover, the high-tech services sector grew by 31%, while the high-tech manufacturing industry grew by 43.1%.
China experienced an increase in FDIs, especially from countries like Germany, Japan, Korea, and the UK. Through the utilization of foreign direct investment (FDIs), Western China experienced the highest growth rate in the country, growing by 43% year-on-year. Central China and eastern China followed with 27.6% and 14.3% growth year-on-year, respectively.
For more than 2 years, China has been able to take advantage of the surging demand of developed markets for imported goods from the country. While other Asian manufacturers have reduced or stopped their operations due to COVID lockdowns, China has managed to keep its factories running as a result of tight restrictions to contain the virus. As such, it resulted in an average 10% increase in export volumes from 2020 to 2021. This rate was more than twice the average growth rate the country experienced in the last three years prior to the pandemic.
Despite the surge in investments during the first 3 quarters of 2022, there are growing concerns from foreign investors with regards to the ending of COVID-19 protocols and the management of the virus.
While the data from the Ministry of Commerce on the influx of foreign capital shows an overall positive picture, its growth is slowing down. A close comparison of the data indicates the growth trajectory is seen to become less steady. This is a result of numerous factors which have started to show their effect on the country’s economy.
For instance, external factors such as the decision from EU countries to shift investment priorities to other markets have become more evident during the past year. Many European investors have begun turning their attention to other sectors and countries, resulting in the highest net outflow of hedge funds in China for the past 15 years.
While foreign investors still want exposure to China given its strong economic potential, many are calling for stability to return to market policies and the economy.
The pandemic is far from its conclusion, especially following the news that various regions of the country are still struggling to contain surges of cases. The global economic slowdown has also pushed investing countries to refocus on more profitable regions and sectors.
Is China Still a Good Place to Invest?
The National Development and Reform Commission (NDRC) published the Catalogue of Encouraged Industries for Foreign Investment (2022 Version), which will take effect in 2023. The Catalogue contains the list of fields that are favorable to foreign investors planning to enter the Chinese local market.
The Catalogue, which has grown over the past few years, has expanded the list to include manufacturing and services in the healthcare, sports, elder care, vocational education, and green energy sectors. China has specified its eagerness in opening its high-tech manufacturing sector to foreign investors, which is expected to also enhance technological improvements at the local and national levels.
With the expansion of the list of industries, China remains highly attractive to foreign investors aiming to take advantage of the country’s large export market and worldwide logistics.
Why is it Difficult to Invest in China?
COVID Disruptions
For more than 2 years China had decided to stick with its zero-COVID policy despite significant economic costs and drawbacks. With the lockdowns and restrictions imposed on business operations in the previous year, investors remain wary of China’s volatile policy positions as well as how the spread of the virus will be managed over the opening months of 2023.
While the Chinese government is working on lifting all restrictions and easing back into ‘normal’ daily life, concerns over the wave of infections, new variants spreading and accurate data surrounding COVID, have investors keeping a watchful eye on China. Nevertheless, while some companies have already exited the market and others were considering exiting, the re-opening is still widely welcomed among the international business community.
Fading Export Demands
As more countries worldwide successfully manage living with the virus, the demand for goods from China continues to slow down. This is a result of other emerging markets in Asia ramping up production to rival goods from China, as well as companies seeking to become less reliant on Chinese manufacturing.
China is also experiencing slowing growth in its exports. Experts agree that if this trend continues, China’s export economy might shrink by 6% on average for the following year. Losing this huge economic driver of the country poses a challenge for investors aiming to take advantage of China’s export economy.
Reasons To Invest in China This Year
Despite the concerns of some investors in regard to increasing investment or growing their operations, the country remains one of the best places to invest in for several reasons, including:
● The Market will be More Open to FDIs
In a bid to encourage more foreign investors to enter the local market, China has expanded its list of allowed industries from 480 to 519. This is the government’s response to stabilize foreign investments amidst the circumstances that make investors think twice about doing business in the country. The new list will take effect on the 1st of January 2023.
According to the NDRC, they are aiming to stabilize foreign investments, optimize investment structure, and boost expectations and confidence of investors.
● Less Competition Due to the Restrictions of the Past Two Years
While economies worldwide stopped during the height of the pandemic, China kept its engines running while mixing in its virus containment strategies. While other countries are starting slowly to reignite their economies, China in general, never stopped its production. Which gave it an advantage over other markets that maintains its attractiveness to investors. As the government implements new policies to further open the economy, China is still expected to maintain an advantage over other countries who wish to compete.
● The World’s Largest Consumer Market
China is still one of the largest economies worldwide and is home to the world’s largest consumer market. Taking into account the size of the population ad the spending power, its existing regulations and policies on foreign investments are still more attractive compared to alternative emerging markets. With the COVID restrictions now being lifted, China’s industrial production and consumer market are poised to rally.
● Improvements in Foreign Investment Services
The Chinese government is organizing and implementing a series of industrial activities that will help bolster the attractiveness of the local market to multinational companies. It aims to create more investment and cooperation activities that will streamline the process of approving, signing, and implementing foreign-funded projects.
● Rebound of Local Equities
China’s GDP growth is expected to increase from 3% to more than 4.5% over the course of this year, as economic prospects and policies improve. Valuation levels are expected to improve as optimizations on COVID-containment policies are made. Additionally, China’s fiscal and monetary policies are expected to control inflation levels in the first 6 months of 2023, making the economy more viable compared to Western and European counterparts that are already experiencing higher inflation levels.
Sectors in China Looking for FDI
For investors looking to enter the Chinese market, here are some of the key areas that they can participate in:
● Manufacturing
Chinese leadership indicated that the country will focus on promoting foreign investments for the manufacturing industry, especially in high-tech components and equipment.
According to the new Catalogue of Encouraged Industries for Foreign Investment, the field of end-product manufacturing has been expanded to include high-tech equipment such as aviation ground equipment, glow discharge mass spectrometers, industrial water-saving equipment, and transmission electron microscope.
In the components and parts manufacturing sectors, foreign businesses that focus on parts for autonomous driving and other high-performance metals are encouraged to invest in the local market.
China also plans to increase its support for foreign-owned companies by allowing them to raise funds through local stock market enlistment.
● Labor-intensive Sectors
China is known to have one of the most affordable labor markets worldwide. The country is further encouraging investors to take full advantage of its labor capabilities by allowing more regions and provinces to open up to employment from foreign-owned companies, particularly the provinces of Anhui, Gansu, Henan, and Jiangxi, as well as the regions of Guangxi, Guizhou, and Ningxia.
● Technical Services in the Green Energy Industry
Foreign investors are also encouraged to dive into providing technical services, specifically in the development of green energy sources and environmental protection. Businesses that provide recycling and processing of waste photovoltaic modules and wind turbine blades are also invited to set up their entities in the country.
● Healthcare Sector
The 2022 FI Encouraged Catalogue encourages foreign investors to participate in the research and production of medical and health textiles, artificial skin, and high-end biomedical dressings. Investors are also invited to put their money into the production of drugs for rare diseases, development of consumables for pharmaceutical manufacturers, and provision of maternal and child services.
Final Thoughts on Investing in China this 2023
China remains one of the world’s leading economies, despite the challenges brought about by the pandemic and other complex global circumstances. The country remains very amicable for foreign investors that are looking to take advantage of the huge export economy, affordable labor, and growing interest in the manufacturing and development of high-tech equipment.
Despite the positive outlook for the Chinese economy this coming year, foreign investors still face challenges in navigating the complex process of establishing a legal entity and hiring local workers in the country. For this, MSA helps organizations navigate the local and national policies in registering a business and following the correct administrative procedures. Get in touch with us right away!
