China’s FDI diminishes for 12th consecutive month

According to official data released by the Chinese Ministry of Commerce, China’s Foreign Direct Investment (FDI) declined in May, marking its twelfth consecutive month in a downward trend, since the early 1990s, underscoring challenges for the nation as Beijing seeks more overseas investment to spur economic development.

The Chinese Ministry of Commerce announced data on Friday that showed a 28.2% decline in inbound foreign direct investment (FDI) to 412.51 billion yuan ($56.8 billion) in the first five months of 2024 compared to the same time the previous year. The percentage continued a trend that began in June 2023 and was worse than the 27.9% decline in April. The metric has been falling since June 2023. After a historic decrease in foreign inflows, China’s government has worked to bolster investor confidence in the nation despite worries about slowing development prospects.

The data illustrates the impact of last year’s Covid lockdowns and sluggish recovery. For the first time since 1998, the investment declined in the third quarter of 2023. Even with a little rebound and increase in the last quarter, the $17.5 billion in new money was still a third less than during the corresponding period in 2022.

The decline in foreign direct investment (FDI) can be attributed to unpredictable trade battles and punitive measures imposed by major Western economies. Increased tariffs and regulatory barriers in China have made it more difficult for foreign businesses to conduct business, prompting some investors to reassess their investment strategies and consider other markets. Geopolitical concerns between China and the West, such as cybersecurity, intellectual property conflicts, and human rights, have also impacted investor sentiment.

Tensions between China and Western nations are rising as FDI keeps declining. Punitive measures, such as increased tariffs on Chinese electric vehicles imposed by the US and the EU, have worsened trade ties. Beijing has responded by opening an anti-dumping probe into EU imports of pork.

The Ministry of Commerce underlined that authorities had stepped up efforts to draw in foreign capital in an attempt to offset the historically low inflows from abroad due to worries about the nation’s waning development prospects since the start of the year and claimed that a high comparison base mostly caused the decline in FDI from January to May. Furthermore, they highlighted an increase in the number of newly established foreign-invested firms in China, which rose by 17.4% to 21,764 in the first five months of 2024.

According to economists, SAFE’s data, which gauges net flows, can reflect trends in foreign company profits and changes in the size of their operations in China. Profits of foreign industrial firms in China dropped 6.7% last year from the prior year, according to National Bureau of Statistics data.

Premier Li Qiang committed to continue extending market access and enhancing the conditions for fair competition when he said in February that stabilizing foreign investment would be a major priority of the year’s economic activity. “Currently, the expectations and confidence of foreign investors are generally stable,” the ministry stated, The Wall Street Journal reported.

The overall declining trend in FDI highlights how critical it is for China to address the underlying issues causing investors to be wary.Developing friendly diplomatic relations with significant trading partners, strengthening the regulatory framework, and ensuring a more transparent and stable business environment may all contribute to increasing investor trust from overseas.

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