Foreign Firms Pull More Money From China's Slowing Economy

The Chinese economy, once a magnet for foreign investment, is now grappling with a significant slowdown, as indicated by the recent withdrawal of foreign capital. According to the China Academy of International Trade and Economic Cooperation, foreign capital withdrawal from China in 2023 was largely driven by geopolitical factors, including the cooling of China-US relations and the U.S. strategy of friend-shoring. This strategy aims to reduce dependency on China's supply chain by prioritizing orders for allied countries, accelerating the pace of foreign capital relocation from China.
The global industrial chain began to shift from China to Southeast Asia, Africa, and other regions due to rising labor and land costs in China. Additionally, the global economic slowdown and geopolitical tensions have contributed to the decline in foreign investment. In 2023, global foreign direct investment decreased by 2 percent to $1.3 trillion, partly due to geopolitical tensions.

The decline in foreign investment has had a significant impact on China's trade balance and export growth. Asian regions, particularly Hong Kong and Singapore, have emerged as the top sources of FDI, contributing 78% of newly established foreign-invested enterprises and 86.5% of overall realized FDI in 2022. This regional shift reflects China's robust economic ties and partnerships within Asia. Meanwhile, investments from the U.S. and Europe have decreased, likely due to geopolitical tensions and supply chain diversification pressures. This change in FDI sources could influence China's trade balance and export growth, as it may lead to a more Asia-centric trade network, potentially reducing reliance on Western markets and fostering regional cooperation. However, it also presents challenges, as reduced investment from advanced economies may slow China's access to cutting-edge technology and management practices.

To attract and retain foreign investment, China can implement several policy measures. First, it should focus on improving the business environment by streamlining regulations and enhancing intellectual property protection. Second, China can offer tax incentives and subsidies to encourage foreign investment in strategic sectors like manufacturing and technology. Third, it can promote regional integration and connectivity by improving infrastructure and facilitating cross-border trade. Lastly, China can enhance its diplomatic efforts to reassure foreign investors about its commitment to economic reform and opening-up.
In conclusion, the shift in foreign investment sources and the decline in foreign capital inflows present significant challenges for China's economy. However, by implementing policy measures to improve the business environment, offering incentives for strategic investments, and fostering regional cooperation, China can mitigate these challenges and continue to attract foreign investment.