How did China become largest FDI recipient in 2020?

China is the second-largest economy, the most populous country, and the largest exporter of our world. According to some experts, its development in the last two decades promises an economic miracle and an exemplary achievement. Despite the negative effects of the coronavirus pandemic, how did China become the largest recipient of foreign direct investment in 2020?

Let's look at what Jonathan Woetzel and Jeongmin Seong of McKinsey Global Institute wrote about China in the article We've Entered the Asian Century and There Is No Turning Back: "What makes these flows work is Asia's diversity. In fact, there are at least four 'Asias', each at a different stage of economic development, playing a unique role in the region's global rise. The first Asia comprises China, the region's anchor economy, which provides a connectivity and innovation platform to its neighbors. In 2013-17, the country accounted for 35 percent of Asia's total outward FDI, with about one-quarter of that investment going to other Asian economies. Reflecting its rapidly growing innovation capacity, China accounted for 44 percent of the world's patent applications in 2017."

Trump's trade war with China cost the Chinese economy loss of market share as stated in UNCTAD's study dating back to November 2019. The study shows that the products which saw elevated tariff rates experienced an average loss of 25 percent in the US market.

The data in the study shows how competitive Chinese companies can be despite all the negativities. They managed to maintain 75 percent of their market share in the shipments. 21 billion dollars of the 35 billion dollar market loss was covered by other countries. The lion's share comes from China's Taiwan. In the first half of 2019, Taiwan exported an additional $4.2 billion to the US compared to the previous period.

Trump's trade war, the COVID-19 pandemic which started in 2020 and the following global shutdowns affected the Chinese economy negatively. Despite these facts, China surpassed the United States in 2020 and became the victor country that attracted $163 billion of foreign direct investment.

Can the size and competitiveness of the Chinese domestic market, qualified workforce, openness to regional and international trade, modern transportation and communication infrastructure, international confidence in the stability of the political environment in the country, and reformist policies be summarized as the reasons for being the biggest recipient of foreign direct investment?

China ranked 31st out of 190 in the World Bank's Doing Business 2020 report a significant leap for China which ranked 46th in 2019. The rise in the ranking happened as a result of the steps taken to improve the business establishment procedures and electricity access. To attract more foreign investment, China has taken additional steps such as lowering tariffs on imports, setting up an online filing system to streamline customs clearance, and making it easier to obtain construction permits.

China has improved its trade tax reforms over the years. While businesses in Shanghai had to spend an average of 832 hours and do 37 payments per year to prepare, file and pay taxes according to the World Bank Doing Business 2006 report, it was reduced to only 138 hours and seven payments per year in 2020.

A report published on the Xinhua website on Aug 28, 2020, which contains quotations from Zong Changqing from the Ministry of Commerce of China, lists the steps that China has taken in 2020 to attract more foreign investment. In the foreign investment negative list published on Jan 1, 2020, which entered into force in July, the number of sectors that are out of the limit for foreign investors has been reduced to 33 from the 2019 list's 40. For the pilot free trade zones, the number of banned industries for investment has been reduced from 37 to 30.

The negative list is a foreign investment management model of China that took effect on Jan 1, 2020. Sectors not included in the negative list, which regulates the access of foreign investment to certain sectors or areas, are open to the investment of all businesses.

According to the new negative list, which was updated more than once in 2020, foreign ownership limits on securities, fund management, futures, life insurance sectors, as well as commercial vehicle businesses and payment systems were removed. Paypal, an American online payment system company, became the first 100 percent foreign-owned third-party payment platform in China. PayPal will compete with local payment giants Alipay and WeChat Pay.

China will expand its market access for foreign investment, according to a Xinhua news report on Jan 29, 2021. "To diminish the impact of the global economic turmoil on the Chinese economy after COVID-19, the Ministry of Commerce (MOC) will continue to expand its market access for foreign investment." A statement by MOC official Zong Changqing emphasized that China will fully implement the new negative list for foreign investment and will further remove restrictive measures.

We will observe all together -- including the provision of investment permits to foreigners in industries such as agriculture, medicine, mining, fuel, infrastructure, and education -- that this will help the Chinese economy recover from its economic decline.

The steps taken by China to attract foreign direct investment should be studied well by other countries on the list, especially the US. Growth in the world economy and the increase in welfare, which should be distributed fairly in all countries, can only be achieved by ending trade wars, reducing global political tensions, signing free trade agreements between countries, and expanding development projects where undeveloped countries are all included.

The author holds a master's degree in Management from Harbin Institute of Technology and is a researcher from Turkey on China's economy and the Belt and Road Initiative.

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