Navigating Geopolitical Risks in China: Implications for Foreign Firms and Global Investors

In 2025, China's regulatory landscape for foreign investment has evolved into a complex interplay of openness and strategic caution. The country's dual focus on attracting capital while safeguarding national security has created a framework that demands careful navigation by global investors. This article examines the legal and operational vulnerabilities foreign firms face in China, identifies resilient sectors poised for growth, and outlines actionable strategies to mitigate exposure.

Regulatory Vulnerabilities: The FISR Framework and Market Access Reforms

China's Foreign Investment Security Review (FISR) system, governed by the Foreign Investment Law (FIL) and its implementing regulations, remains a critical compliance hurdle. Transactions involving sectors like critical infrastructure, information technology, and defense-linked industries require pre-approval from the National Development and Reform Commission (NDRC). The FISR process, which can take 15–60 working days, mandates that foreign investors avoid proceeding with acquisitions or greenfield investments until clearance is obtained. Failure to comply risks transaction suspension and reputational damage.

Recent reforms, however, signal a more open approach. The Negative List for Foreign Investment (2024 version) eliminated restrictions in the manufacturing sector, while the Action Plan for Stabilizing Foreign Investment (February 2025) expanded market access for foreign equity in listed companies. For instance, foreign individuals can now make strategic investments, and asset requirements for such investments have been eased. These changes aim to position China as a hub for advanced manufacturing and modern services, but they also highlight the need for firms to balance optimism with vigilance.

Resilient Sectors: Where Opportunities Align with Policy

Despite geopolitical headwinds, several sectors in China remain attractive due to policy support and structural demand:

1. Advanced Manufacturing: The revised Catalogue of Encouraged Industries for Foreign Investment prioritizes biotechnology, telecommunications, and green technology. Foreign investors in these fields benefit from tax incentives and streamlined approvals.
2. Biopharmaceuticals: China's push to become a global leader in drug innovation includes expedited regulatory pathways for foreign firms. Pilot programs for segmented production trials and bulk drug procurement are reducing barriers to entry.
3. Modern Services: Sectors like education and healthcare are opening to foreign participation. For example, wholly foreign-owned hospitals and value-added telecom services are now permitted in pilot zones.
4. Regional Development: Underdeveloped regions in central, western, and northeastern China are receiving targeted investment incentives, offering diversification opportunities for firms wary of over-reliance on coastal hubs.

These sectors are resilient not only because of policy tailwinds but also due to China's deep industrial ecosystems and domestic demand. For instance, the biopharmaceutical industry's growth rate outpaced global averages in 2024, driven by aging demographics and rising healthcare spending.

Mitigation Strategies: Balancing Risk and Reward

Foreign firms must adopt a multi-pronged approach to navigate China's regulatory and geopolitical challenges:

1. Cross-Border Restructuring: Instead of full relocation, firms are reconfiguring supply chains to retain key operations in China while diversifying production to countries like Vietnam or India. This "China + 1" model reduces exposure to U.S.-China tensions while leveraging China's R&D and manufacturing capabilities.
2. Deep Local Entrenchment: Firms with long-term partnerships and localized supply chains are less likely to exit during crises. For example, a U.S. automotive company that integrated with Chinese suppliers during the trade war retained its market share despite tariffs, as local stakeholders lobbied for its continued operations.
3. FISR Compliance and Pre-Application Consultations: Engaging with the FISR office early in the investment process can preempt delays. This is critical in sectors like data services or critical infrastructure, where national security concerns are heightened.
4. Leveraging Financial Flexibility: The 2025 action plan allows foreign firms to use domestic loans for equity investments and regional expansion, reducing capital constraints.

Case Study: The Biopharmaceutical Sector

The biopharma industry exemplifies how foreign firms can thrive in China's evolving environment. A European biotech firm recently secured approval for a joint venture in Shanghai, leveraging China's expedited regulatory framework and access to a vast patient pool for clinical trials. By aligning with a state-backed research institute, the firm navigated FISR requirements and gained market access while mitigating geopolitical risks through dual sourcing of raw materials.

Conclusion: Strategic Caution in a High-Stakes Environment

China's regulatory environment in 2025 is a double-edged sword: it offers unparalleled access to a $17 trillion economy while demanding rigorous compliance. For foreign investors, success hinges on three pillars:
- Sector Selection: Prioritize resilient industries aligned with China's 14th Five-Year Plan.
- Regulatory Agility: Master FISR processes and engage in pre-application consultations.
- Geopolitical Hedging: Diversify supply chains and adopt cross-border restructuring to buffer against shocks.

As geopolitical tensions persist, the key is not to retreat from China but to adapt. By combining strategic patience with proactive risk management, foreign firms can capitalize on the opportunities in this dynamic market while safeguarding their global interests.