Beijing is making a major—some might say desperate—effort to restart the once powerful flows of foreign investment into the country.
Even as Chinese leader Xi Jinping has expressed a desire to insulate China from foreign influences, others in Beijing have nonetheless awakened to the importance of foreign investment in China—for development capital and technology transfers. High-level officials have accordingly begun to woo foreign investment actively, but they face an uphill battle.
The drop in foreign investment in China has been nothing short of dramatic. In 2024, such inward-bound money flows from abroad fell more than 27 percent from the levels of 2023, the steepest drop since 2008, the year of the global financial crisis. Last year’s decline followed an almost 13.5 percent drop in 2023. Declines of this sort have accumulated to fully 90 percent from the peak of direct investment flows in 2021.
Investment flows from the United States have held up better than those from most other places. Even so, the pace at which American money has flowed has slowed markedly. Since 2020, American direct investment in China has increased at only a 4 percent annual rate, less than half the 11 percent annual pace averaged between 2010 and 2020.
Europe shows even less enthusiasm. In 2023, the most recent period for which complete data are available, European direct investment in China fell 29 percent from the year before.
Japan, once a huge investor in China, has cut back its investment lows by some 60 percent over the last decade.
Beijing can mostly blame itself for this sorry loss. For a long time, foreign investors complained about China’s behavior toward them, particularly the bias in government procurement toward domestic providers, the lenient disciplining of patent theft from Western and Japanese firms, and the demand that any foreign firm doing business in the country had to have a Chinese partner with whom it had to share its trade and technology secrets.
These sore points are a big part of the reason Washington imposed tariffs on China in 2017 and 2018. Most foreign investors put up with this difficult environment because China’s low wages made production there cost-effective and because China’s rapidly growing economy offered tremendous sales opportunities. But in recent years, China’s pace of growth has slowed dramatically, and Chinese wages have outpaced wage growth elsewhere in Asia and Latin America.
The Chinese Communist Party (CCP) reinforced the ill effects of these comparisons by imposing zero-COVID measures for years after the pandemic when other places were opening up. The lockdowns and quarantines imposed by Beijing’s zero-COVID edicts interrupted production schedules and greatly undermined China’s once-prized reputation as a reliable source of products. All those factors prompted foreign investors to look elsewhere.
But that is not all. There is also the growth of trade tensions between China on the one hand and the United States, Europe, and Japan on the other. The tensions have further persuaded foreign investment money to stay away.
Now, new tariffs are being imposed by the Trump administration. While the tariff levies extend across a much wider field than just China, there is no mistaking that Chinese trade and Chinese products are a focus. Any practical business manager can see that the better part of valor is to steer clear of anything close to this dispute.
The loss of benefits from foreign investment for some years now has convinced Beijing to try to restart them. In recent weeks, high-ranking officials have announced new incentives to accomplish this.
An executive meeting of China’s State Council—chaired by Premier Li Qiang—recently outlined moves with this goal in mind. It called for greater patent protections and the simplification of procedures for foreign personnel to travel to and within China. The committee advised regulators to “streamline regulations and procedures for cross-border mergers and acquisitions.”
The committee promised to do away with past practices and treat all companies—domestic or foreign—the same when it comes to government procurement. As an indirect spur to foreign investment, the committee also recommended policies to accelerate economic growth and increase tourism and consumer spending, absolutely and as a portion of the economy.
It remains an open question how much foreign investing these efforts will raise. Beijing has said such things before but failed to come through on substantive, much less effective change. It is noteworthy that Beijing has not provided details about these policy changes and aspirations.
Even if the CCP manages to make more change than in the past, the legacy of past failures will continue to influence the decisions of foreign investors, as will developing trade tensions that show no sign of relaxation. If these efforts manage to restart some foreign investment flows, past peaks will almost certainly remain elusive.
