US-Asia Business

China’s FDI Hit Record High, Global FDI Rebounds in 2021

China saw record high FDI inflows topping RMB 1 trillion last year, driven by strong services FDI. China’s FDI inflows from RCEP member countries are expected to jump this year as the agreement takes effect from January 1, 2022.

In 2021, China’s actual use of FDI hit RMB 1.149 trillion, representing a 14.9% surge from the previous year. In U.S. dollar terms, the FDI inflows came in at $173.48 billion, up 20.2% year-on-year, according to the Ministry of Commerce (MOFCOM).

The robust double-digit growth last year is considered remarkable on a relatively high base in 2020—China registered positive growth of 5.7% at a time when global FDI plunged 34.7%.

As to the number of foreign-invested enterprises (FIEs), about 48,000 were registered in 2021, up 23.5% year-on-year. This continues the recovery from a slump in 2019 that saw the figure drop to 40,910 from 60,560 in 2018.

China had remained as the world’s second biggest FDI recipient for four years in a row, from 2017 to 2020, only after the U.S., according to MOFCOM. It even narrowed the gap that year when the U.S. saw a sharp drop from $261 billion to $156 billion in FDI inflows due to the pandemic.

In 2020 when global FDI saw a deep decline, China’s actual use of FDI accounted for about 15% of the global total, up from the 6.7% recorded in 2015.

In 2021, overall global FDI flows showed a strong rebound, up 77% to reach an estimated $1.65 trillion, and surpassing pre-pandemic levels, according to the United Nations Conference on Trade and Development (UNCTAD). China’s share of global FDI flows is expected to fall back somewhat, as FDI in most economies rebounded, among which FDI flows into the U.S. more than doubled and into ASEAN countries increased 35%.

A closer look at China’s FDI inflows in 2021

FDI jump into the service industry and high-tech sectors

China’s robust FDI growth in 2021 was powered by strong investment in services and high-tech sectors.

The total FDI inflow into the service sector increased 16.7%, year-on-year, to RMB 906.49 billion ($142.77 billion).

High-tech FDI continued to outperform, with the sector seeing FDI inflows jump 17.1% from a year earlier, measured in Chinese yuan. Of it, high-tech manufacturing rose 10.7%, and high-tech services grew 19.2%.

The MOFCOM didn’t reveal data for manufacturing FDI in 2021. Manufacturing FDI trends are likely to remain flaccid, dampened by ongoing investment diversion into bolster supply-chain security, according to Fitch Ratings.

FDI growth into eastern and western China were reported at similar levels, while China’s central region saw a relatively faster rate of FDI inflow.

In 2021, the FDI actually used in China’s eastern, central, and western regions climbed by 14.6%, 20.5%, and 14.2% year-on-year, respectively.

Investment into the Chinese mainland from countries along the Belt and Road Initiative (BRI) and the Association of Southeast Asian Nations (ASEAN) jumped 29.4% and 29%, respectively.

Fitch Ratings in November 2021 projected the total FDI in China would see more inflow from the 14 member countries of the Regional Comprehensive Economic Partnership (RCEP), which takes effect this year.

RCEP member countries, which include Singapore, South Korea, and Japan, together accounted for 42% of China’s total FDI in 2020, excluding Hong Kong and Macao (a large portion of inflow from Hong Kong and Macao is originated by Chinese companies).

As the COVID-19 pandemic, the volatile political environment, and rising input costs continue to post challenges, the Chinese government has pledged to stabilize FDI and foreign trade this year.

At a press briefing held on January 25, Chen Chunjiang, Director-General of the Commerce Ministry’s Department of Foreign Investment Administration, said that China will step up efforts to open up its market and optimize support measures this year.

China will ensure the implementation of the 2021 version of negative lists for foreign investment. The national and free trade zone (FTZ) negative lists updated in 2021 reduced the number of sectors in which foreign investors are restricted or prohibited. Among others, the lists removed limits on foreign ownership in passenger-car makers.

The government will also expand the catalog of industries encouraging foreign investment, leveraging preferential policies on land and taxation to lure more foreign capital into advanced manufacturing, modern services, high-tech sectors, low-carbon and green industries, digital economy, and in the central and western regions.

China will also promote the RCEP’s entry into force this year, and allow an unprecedented level of access to its markets in a bid to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Chen also promised that China would further optimize its business environment, ensure effective enforcement of the foreign investment laws and regulations, the establishment of the complaint mechanism for FIEs, the protection of intellectual property rights (IPRs), and equal treatment for domestic and foreign companies.

This article first appeared on China Briefing, which is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in China, Hong Kong, Vietnam, Singapore, India, and Russia.