A security surveillance camera overlooks a street in Beijing. Chinese authorities' effort to root out spies has fueled concerns among foreign companies. © Reuters
Investment in China by companies based abroad has sunk to the lowest level in 30 years, according to official data released on Sunday, in a sign that foreign corporations are leaving China due to tougher crackdowns on spying and U.S. sanctions.
China's foreign direct investment totaled $33 billion on a net basis in 2023, according to the State Administration of Foreign Exchange, down about 80% from 2022. The figure was positive as new investment surpassed outflows. But FDI declined for the second straight year and is less than 10% of the peak of $344 billion marked in 2021.
Inflows exceeded outflows by $17.5 billion in the October-December quarter. This followed the first-ever net outflow recorded in the prior quarter.
China has been working to attract investment, personnel and technologies from abroad under the "reform and opening up" policy spearheaded by Deng Xiaoping starting in the late 1970s. FDI is at its lowest point since around the time Deng pushed for accelerating that policy during a tour of southern China in 1992.
Foreign companies have been scaling down their Chinese operations after the Chinese government focused more on protecting national security, including a crackdown on spying. Authorities tightened their grip on research companies conducting market analysis and other activities, and there have been reports of workers of foreign companies being detained.
Gallup, the American research company, decided last year to withdraw from China, according to the Financial Times.
U.S. and European companies often conduct extensive research on business conditions before investing, but this work is said to have been delayed at many research companies due to revisions to the anti-espionage law that took effect in July.
"We have been unable to sufficiently conduct research" needed for new investment, said an executive at an American company.
Japanese businesses have similar concerns. In a survey of Japanese companies operating in China conducted in November and December, several respondents expressed concern about their everyday lives due to uncertainties over the anti-spying law, and noted that headquarters are not approving investment proposals.
With the U.S. restricting China's access to advanced semiconductors, chip-related businesses are clearly shifting away from the country. China accounted for 48% of global chip-related FDI in 2018, but this figure plunged to 1% in 2022, according to the Rhodium Group.
American chip-related FDI surged to 37% from 0% during that time span, while the combined share of India, Singapore and Malaysia rose to 38% from 10%.
U.S. company Teradyne, a major manufacturer of testing equipment for chip fabrication, has relocated its key production facility from China's Jiangsu province to Malaysia, according to Chinese media. Britain's Graphcore, which develops chips for artificial intelligence applications, has reportedly laid off most of its employees in China.
Meanwhile, automakers have been forced to change as Chinese players become more competitive. Mitsubishi Motors said in October that it will stop producing autos in China. Toyota Motor and Honda Motor are reducing staff at their Chinese joint ventures.
The prolonged slowdown in China's economic growth is another reason foreign companies are refraining from investing. Domestic demand is weak due in part to the real estate market slump, and there are warning signs for deflation.
Although Chinese companies have started to gain a technological edge in some fields, such as electric vehicles and surveillance cameras, they still need the support of foreign companies in areas such as advanced chips. China's improvements in productivity could slow down if foreign corporations continue to pull out or scale down their operations there. This, along with the shrinking of the labor force, could hurt China's economic growth over the medium to long term.
Aware of these risks, the Chinese government last month eased the revenue requirement for companies subject to screenings before joint ventures can be approved under antitrust laws. By making it easier to conduct acquisitions, including those involving foreign companies, the government hopes to make the Chinese market more attractive.
However, foreign companies are concerned because of uncertainties over how China will implement its policies regarding national security and other areas, as well as structural reasons for the slower economic growth. Whether the government's efforts to open up will lead to new investment by foreign companies remains to be seen.
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