Good use of FDI key to cultivating new forces

Global foreign direct investment has been affected by tightening financial conditions, high real interest rates and market uncertainties. Additionally, turbulence in the banking sector in Europe and the United States this year is expected to lead to a further decline in global FDI from the $1.3 trillion recorded in 2022.

The slowdown in global capital flows also reflects a sensitivity to various factors in the global market.

First, global economic growth is decelerating. The IMF and the World Bank expect global economic growth this year to be similar to or slower than that of 2023.

Second, the trend of deglobalization continues. From decoupling to so-called de-risking and the "Indo-Pacific Economic Framework", these trends will have a potential impact on capital flows.

Third, geopolitical conflicts are intensifying while the interest rate hike cycle continues, with the soaring US dollar coexisting with high interest rates. This reduces the efficiency of global supply chains and logistics, thereby increasing the impact on global capital flows and foreign investments.

Fourth, the US debt crisis is escalating. This year, the high US national debt — which now tops $35 trillion — is increasingly burdensome. And debt financing in the US now exceeds defense spending.

Currently, the US is the largest recipient of FDI globally and the country with the largest FDI scale among developed nations. China is the second-largest FDI recipient worldwide and the largest among developing countries.

The greenback is still in an interest rate hike cycle, which benefits the return of dollars to the US, which will inevitably affect China and other developing countries in terms of foreign capital utilization.

The US recorded a net FDI inflow of $87.3 billion this year. However, developed countries are experiencing overall net FDI outflows.

Germany and France, in particular, have been significantly affected by inflation and the Russia-Ukraine conflict. Germany's net capital outflow decreased from $132 billion in 2022 to $86.6 billion, while France's net capital outflow increased from $11.6 billion in 2022 to $23.8 billion.

Developing countries are facing increasing pressure from the current dollar interest rate hike cycle, exacerbating inflation issues in many of these countries, with a downward trend in FDI inflows in emerging markets in Asia and Latin America.

For China, the scale of foreign capital utilization is declining due to the COVID-19 pandemic and structural adjustments. China's FDI utilization rate in 2023 decreased by about 8 percent. However, the number of foreign enterprises in China increased by nearly 40 percent, and the structure of foreign capital utilization has been optimized.

Data from the Ministry of Commerce showed that China's net FDI inflow in 2023 was 1.1 trillion yuan ($137 billion). From a structural optimization perspective, the actual utilization of foreign capital in manufacturing accounted for about 30 percent, with a relatively low year-on-year decline of 1.8 percent.

High-tech manufacturing saw a 6.5 percent year-on-year increase in actual foreign capital utilization. The service industry's actual foreign capital utilization reached nearly 780 billion yuan, accounting for 70 to 80 percent of the total, with a significant year-on-year decline of 13.4 percent.

With the overall rise in costs of capital, technology, labor, R&D and financing in China, those who invest and develop long-term in China are those foreign enterprises engaged in high-value-added, high-tech modern service industries, high-tech industries and advanced manufacturing.

These areas have become important fields and directions for foreign investment in China, which align with China's goal of fostering new quality productive forces, and can promote high-quality development.

China has introduced more than 20 detailed measures for foreign investment utilization this year, and local governments are accelerating the implementation of such measures. We have reasons to believe in the stabilization of China's foreign capital utilization this year and better prospects for future foreign investment in the country.

Foreign investment in China can be categorized into two types based on investment purposes — cost-driven and market-oriented. Cost-driven foreign investment often views China as a core of global supply and value chains.

According to a World Trade Organization report, China is undoubtedly one of the key countries in global supply and value chains, alongside the US and Germany, which are at the center of the East Asian, North American and European economic regions, respectively.

In this context, China is unique globally for its comprehensive industrial system, covering 99.9 percent of the United Nations' classified industries across 41 major categories, 207 mid-level categories and 666 minor categories. China's industrial output accounted for 32 percent of the global total, making it the most efficient in organizing and coordinating global supply and value chains.

This efficiency attracts a substantial amount of foreign capital, especially from developed countries to China, for operations in the Asia-Pacific region and globally.

From the perspective of market-oriented foreign investment, China is now the world's second-largest single consumer market, second only to the US. With a population of 1.4 billion, China is at the stage of middle-income development, where consumer spending contributes 82 percent to economic growth (2023 data), which demonstrates the significant role of domestic demand in driving economic growth.

China's retail sector is approaching that of the US, and in services consumption, sectors such as cultural tourism, education and training, comprehensive healthcare and information services are rapidly expanding. Currently, 70 percent of the products and services provided by foreign-invested enterprises in China are aimed at the Chinese consumer market.

Therefore, China has comparative advantages in attracting and utilizing foreign investment.

First, capital highly values infrastructure conditions, in terms of both hardware and software. Over the past 45 years, China has followed a principle of "To get rich, build roads first", which leads to significant infrastructure development.

High-speed railways, highways, airports, ports, efficient logistics and coordinated transportation across sea, land and air, along with container transport, port conditions and communication support all make China's infrastructure conditions unique and help it lead globally.

Second, China is vigorously promoting institutional openness and has signed 22 bilateral and multilateral free trade agreements with 29 countries and regions. Among these, the Regional Comprehensive Economic Partnership covers 30 percent of the world's population, 30 percent of the global economy, over 30 percent of capital flows and over 30 percent of trade.

The RCEP, as the largest integrated market globally, enhances trade creation, investment and employment growth within the region. In 2022, China's actual use of foreign investment from RCEP partners reached $23.5 billion, a 24.8 percent year-on-year increase, significantly higher than the 9 percent growth in foreign investment in China.

The RCEP contributed 29.9 percent to China's actual foreign investment utilization, up 17.7 percentage points from 2021.We expect the RCEP to increasingly support China's foreign investment in the future.

In addition, China has established 22 pilot free trade zones, including Hainan Free Trade Port. Such a platform represents China's high-standard opening-up to the world. We now encourage the synergy between the small free trade zone network formed by pilot free trade zones and the large free trade network established by free trade agreements, thus enhancing efficiency for both domestic and foreign investments.

In 2022, China's 21 free trade zones, covering less than 4 percent of the nation's land area, contributed over 18 percent of the country's foreign investment and 17.9 percent of import and export trade. In the first half of 2023, these figures rose to 18.4 percent and 18.6 percent, respectively.

Last, China currently boasts a multitiered human resources system. Although the demographic dividend of a large labor force is diminishing, China now benefits from the "engineer dividend".

The average education period of young Chinese workers is 11 years, which surpassed those of other developing countries like India, Mexico and Vietnam. This means that China's human resources system can systematically support and meet the needs of foreign investment.

Also, there is no clear trend of countries like Vietnam, India or Mexico replacing China as the global manufacturing hub. Therefore, China's role as the world's manufacturing center is likely to be maintained for an extended period. From this perspective, foreign investment will continue to play an active role in China's journey toward high-tech and service-oriented development.

To introduce more high-quality foreign investment, China should firmly support globalization and regional economic integration, as well as the Belt and Road Initiative to increase its influence and attractiveness to foreign investors.

This requires further liberalizing ideas and continuously improving the business environment to create an international, market-oriented and law-based business environment. It is especially important to improve service sector efficiency and quality for foreign enterprises.

Also, given the increasingly specialized global division of labor, attracting both upstream- and downstream-related enterprises will significantly enhance the efficiency of industrial chains.

At the same time, China should leverage the advantages of free trade agreements, free trade zones and free trade ports and enhance foreign investment in central and western regions. Chinese business associations should also play a more active role in attracting foreign investment.

The writer is a researcher at the Chinese Academy of International Trade and Economic Cooperation.

This article is a translation of excerpts of his op-ed piece published on the official WeChat account of the China Macroeconomy Forum, a think tank.

The views don't necessarily reflect those of China Daily.