In 2024, China’s actual use of foreign investment decreased by 27.1% compared to the previous year, marking a historic record drop. Official Chinese media attributed this decline to market structural adjustments and blamed foreign enterprises for not holding their ground. However, shortly after, the authorities held a meeting and issued a document to “stabilize foreign investment”. Experts revealed that the data related to foreign investment in China from different government departments conflicted with each other, raising suspicions of falsification. Analysis showed that due to changes in both domestic and international environments, the trend of foreign capital withdrawing from China has become inevitable.
The data released by the Chinese Ministry of Commerce last month showed that in 2024, the number of new foreign-invested enterprises in China reached 59,080, a 9.9% year-on-year increase. However, the actual use of foreign investment amounted to only 826.25 billion yuan, a significant drop of 27.1% compared to the previous year. This unprecedented decline raised concerns.
On February 10, the official Chinese media “People’s Daily” published a front-page article titled “Is there a large-scale withdrawal of foreign investment from China?” emphasizing that the inflow pattern of foreign investment in China is being adjusted, stating that “traditional business models no longer work in China, and only foreign enterprises that quickly adapt to changes in the Chinese market can succeed”.
American economist David Huang pointed out that the significant drop in China’s actual use of foreign investment cannot solely be attributed to temporary changes. While the trend of foreign capital shifting towards high value-added industries does exist, the main reasons for the decrease in foreign investment are the worsening external environment faced by Beijing, policy uncertainties domestically, along with improvements in intellectual property protection, changes in China’s tax policies, geopolitical risks, leading many enterprises to choose to withdraw.
He believed that the official media’s articles were more of a light defense, attempting to downplay the fact that foreign investment confidence was declining.
China expert Wang He stated that China’s market has indeed undergone significant changes in recent years. Foreign investors can no longer make the same profits as before in China. However, this is not the main reason for the current exodus of foreign investment. The primary factors lie in China’s current dire economic situation, the authorities pushing for self-reliance, the suppression of foreign investment under the guise of national security, the deterioration of the business environment, which have all led to the withdrawal of foreign capital from China.
The aforementioned article by the People’s Daily also cited a query from a netizen: Why did the actual use of foreign investment decrease by 27.1% year-on-year, while the number of newly established foreign-invested enterprises increased by 9.9%? The official explanation was that as the entry barriers for foreign investment in China continue to decrease, more and more small and medium-sized foreign-invested enterprises are entering the Chinese market.
Regarding the decrease in the scale of foreign capital inflows, the official media article vaguely stated that in 2021, China had consecutively attracted over 1 trillion yuan in foreign capital for three years, which concentrated investment demand. The slight contraction by 2024 was within a normal range. Looking at the long term, global cross-border investment is showing a trend towards services and light assetization, hence there might be a temporary discrepancy between the scale of foreign investment utilization and the number of newly established enterprises.
David Huang pointed out that according to the Ministry of Commerce’s data, the number of newly established foreign-invested enterprises increased by 9.9%, but the actual use of foreign capital decreased by 27.1%, indicating a clear contradiction between the two sets of data. This could be due to the increase in shell companies and false foreign investments, where some so-called foreign-invested enterprises might actually be local or from Hong Kong, Macau, or Taiwan, pretending to be foreign to enjoy preferential policies.
He gave an example of the “domestic guarantee for foreign loans” model in China, where domestic assets are used as collateral for loans from foreign banks for foreign-invested enterprises. This practice inflates the number of foreign-invested enterprises but might actually involve low actual funds.
Public data shows that “domestic guarantee for foreign loans” refers to domestic banks in China providing guarantees for domestically registered subsidiaries or joint ventures investing abroad, with corresponding loans issued by foreign banks to foreign-invested enterprises.
David Huang mentioned that the second reason for the conflicting data is that the newly established enterprises might be small and micro enterprises or supportive enterprises set up by Taiwanese businesses through united front strategies. These companies have lower capital requirements, or are more service-oriented with fewer assets or investments, hence reflecting a low contribution of foreign capital in terms of financial reports. It is even possible that some newly established enterprises are just paper entities, shell companies, created to receive government subsidies and united front expenses.
Moreover, there is a structural reason for the actual decrease in investment, as large foreign enterprises, such as some multinational manufacturing giants, are reducing their investments in the Chinese market, while small and medium-sized service-oriented enterprises are increasing. The exit of foreign capital from the manufacturing sector will significantly reduce the overall amount of foreign capital utilization.
Furthermore, large foreign enterprises mainly come from Europe, America, Japan, and Korea. These foreign investments are more susceptible to geopolitical influences, resulting in faster withdrawal rates and higher withdrawal proportions. Meanwhile, some smaller funds might be coming in from regions like Southeast Asia, establishing new companies.
Lastly, there may be adjustments to statistical data for beautification purposes. David Huang stated that the statistics from mainland China tend to cater to political needs and often downplay or even taboo negative signals. Therefore, there could be possibilities of statistical modifications and beautifications.
“In conclusion, the increase in the number of newly established enterprises and the decrease in foreign capital do not contradict each other. Apart from statistical distortion, the underlying reasons could be the decline in the quality of newly established companies, with actual large investors possibly withdrawing while small investors are entering,” he said.
Wang He mentioned that the data from different departments within the Chinese government clashed. In terms of foreign investment, there are two references – one from the Ministry of Commerce, which is narrow in scope, and the other is the international balance sheet released by the State Administration of Foreign Exchange. These two sets of data conflict.
He exemplified that the Ministry of Commerce already announced that the year-on-year growth rate of foreign direct investment in China for the first 11 months of 2024 was -27.9%, with an inflow of 749.7 billion yuan. However, data from the State Administration of Foreign Exchange showed that the net inflow of foreign direct investment in China for the first three quarters of 2024 was -13 billion US dollars, and it should be negative for the full year of 2024.
Wang He stated that according to the latest economic census from the Chinese authorities (as of the end of 2023), between the end of 2018 and the end of 2023, the number of employees in Chinese foreign-invested enterprises decreased from 28.242 million to 20.409 million, a decrease of 7.833 million, representing a 27.7% decline. The significant decrease in the number of employees employed by foreign capital companies over these five years actually corresponds to the exodus of foreign investments. Therefore, the data from the State Administration of Foreign Exchange might be closer to the actual situation.
Regarding the claim by the official media that current multinational investments entering China exhibit a trend towards services and light assetization, resulting in an increase in the number of foreign enterprises but less capital inflow, Wang He expressed doubt, saying, “Let’s take Europe for example. The EU’s investments in China mainly rely on a few large companies, while its small and medium-sized enterprises have already withdrawn from China and have hardly invested at all.”
He further mentioned that China’s data is consistently falsified or adjusted for beautification purposes and does not represent the actual situation.
The State Council of China held a meeting on February 10 and passed the “Action Plan for Stabilizing Foreign Investment in 2025”, emphasizing the essential role that foreign enterprises play in job creation, stable exports, etc., and calling for more practical measures to ensure the “stability of existing stock and expansion of flow” of foreign-owned enterprises.
Wang He noted that when the Sino-US trade war began in 2018, the Chinese authorities emphasized the “six stabilizations,” including “stabilizing foreign investment and foreign trade.” Now, the slogan has been changed to “stabilization of existing stock and expansion of flow.” This shows that the current outflow of foreign investment from China is severe; not only is there no increase, but even the existing stock is being shaken. China is now relying on the influx of foreign capital to remedy the situation.
Wang He said that there was indeed a large-scale inflow of foreign investment into China in 2021, but by 2022, Shanghai alone had completely reversed the trend. With Trump returning to the White House, a new Cold War between China and the US may be imminent. In this scenario, the CCP’s attempts to increase both stock and flow of foreign investment are delusional. By taking a tough stance against Trump, which only worsens the international environment, it is highly unlikely for foreign capital to flow back into China on a large scale. Therefore, their so-called plan to stabilize existing stock and expand flow is almost unachievable.
Huang David stated that the Beijing officials, on one hand, are denying the retreat of foreign capital while on the other hand proposing measures to stabilize foreign investment, reflecting a contradictory mentality. If the situation for foreign capital were truly favorable, there would be no need for a massive effort to stabilize foreign investment, indicating that this move actually acknowledges the deteriorating environment for foreign capital.
Huang David mentioned that the documents from the State Council are not very effective in China because the authorities control everything, and the Party’s documents, along with regulations such as the “Anti-Espionage Law,” continuously tighten control, creating an atmosphere of economic uncertainty. He believes that with increasing geopolitical pressures, the trend towards de-globalization of industrial chains, along with the rise of the manufacturing industry and market in Southeast Asia, China’s action plan to stabilize foreign investment will find it challenging to reverse the exodus of foreign capital.
Interestingly, the official China Council for the Promotion of International Trade previously released the 2024 China Business Environment Report, stating that “the surveyed companies rated the 2024 China business environment as 4.37 points (out of 5),” and “nearly 90% of the surveyed companies rated the China business environment as ‘very satisfied’ or ‘comparatively satisfied’,” also noting that “more than 60% of the surveyed companies have optimistic expectations for the future of China.”
However, a recent survey by the American Chamber of Commerce in Shanghai indicated that over 50% of respondents held a pessimistic view on the business prospects in China for the next five years. The European Chamber of Commerce also publicly criticized China’s increasingly politicized business environment, stating that thousands of suggestions offered by companies had received minimal to no response.