China’s FDI slumped to a 30-year-low in 2023

China's declining FDI: China's economy is grappling with a substantial setback as foreign direct investment (FDI) hits a three-decade low, according to data released by the State Administration of Foreign Exchange. The figures reveal a stark reality, with FDI plummeting to $22 billion on a net basis in 2023, an alarming 82 per cent drop from the previous year and the lowest since 1993.

This marks the second consecutive year of decline, with FDI now less than 10 per cent of the peak seen in 2021 at $344 billion. Despite Beijing's persistent efforts to attract overseas investment, the unexpected downturn is attributed to the lingering impact of COVID-19-induced lockdowns and a sluggish recovery in 2023.

Factors leading to the steep decline

However, a deeper examination suggests that geopolitical tensions and other factors are exacerbating the situation. The evolving landscape includes foreign companies withdrawing capital from China due to concerns over national security, heightened interest rates elsewhere, and an increasingly stringent regulatory environment.

Reports indicate that the Chinese government's focus on safeguarding national security, including crackdowns on spying and U.S. sanctions, has led to the detention of workers from foreign companies. The revised anti-espionage laws, implemented in July, have further complicated matters, causing delays in research conducted by foreign companies to assess business conditions in China.

Chine plus one

The exodus is not limited to smaller players. Major corporations like Teradyne and Graphcore have shifted their operations out of China, reflecting a broader trend of businesses reassessing their commitments to the region.

China's prolonged economic slowdown, attributed to weak domestic demand, a real estate market slump, and deflationary concerns, is another contributing factor. Companies are also wary of uncertainties surrounding Beijing's policy implementation, especially in areas such as national security.

As multinationals seek more favorable interest rates in advanced economies, China's efforts to stimulate its economy through interest rate cuts are falling short. The declining FDI figures underscore the challenges facing China in maintaining its appeal to foreign investors, posing potential ramifications for the country's economic trajectory.

FDI across the world

According to UNCTAD, after a strong rebound in 2021, global FDI fell by 12 per cent in 2022 to $1.3 trillion, due mainly to overlapping global crises – the war in Ukraine, high food and energy prices, and soaring public debt. 

The decline was felt mostly in developed economies, where FDI fell by 37 per cent to $378 billion. But flows to developing countries grew by 4 per cent – albeit unevenly, with a few large emerging countries attracting most of the investment while flows to the least developed countries declined.