Up, up and not away

WU HEPING/FOR CHINA DAILY

Foreign direct investment into China has been surging since the beginning of this year, setting a new record. In the first half of 2021, paid-in FDI(excluding the banking, securities and insurance sectors) reached 607.84 billion yuan ($90.96 billion), up 135.66 billion yuan which equals 28.7 percent year-on-year, or up 27.1 percent compared with the same period in 2019, even considering a low base in 2020.

Paid-in foreign capital has regained momentum since the second half of last year, up 6.2 percent in 2020, making China the top destination for foreign capital. And paid-in foreign capital continues to increase at a high speed, showing a clear positive trend over all and reversing the prolonged slump since 2016, which mirrors foreign investors' strong confidence in China's market.

Despite a complex and changing international landscape amid the pandemic, FDI scaled new highs for the following reasons.

First, with the pandemic largely under control, China continues to boost production. It reported 5.3 percent GDP growth on a two-year average basis in the first half of this year, and corporate profits rebounded upward, boosting foreign investors' confidence in China.

Second, China has a reliable supply chain. Multinational corporations have realized the importance of a reliable global supply chain as countries respond differently to the pandemic. With safe and reliable infrastructure, a complete industrial system, an edge in human capital, and an efficient and pragmatic government, China has shown strong capacity in ensuring supply chain dependability to the satisfaction of multinational corporations.

Third, further opening-up of the service sector has created new room for foreign investments. In recent years, China has been trimming the negative list for foreign investments in the service sector and implementing a comprehensive pilot program to open its service sector wider, to which foreign investors have responded favorably. In the first half of this year, paid-in foreign capital in China's service sector reached 482.77 billion yuan, up 33.4 percent year-on-year.

Finally, China, with its massive market, remains a magnet for foreign investors. With increasing awareness of opportunities in China's consumer market, foreign companies are better serving Chinese consumers through local production and operations in China. The American Chamber of Commerce in China released its 2021 American Business in China White Paper in May, showing that more than half of the surveyed companies see consumption growth on the back of an affluent and growing middle-income group as the top business opportunity in China.

Meanwhile, global cross-border investment is still at an all-time low. Amid a complex and changing international political and economic landscape, China still faces many uncertainties in attracting FDI.

First, it will be difficult for China to remain the only outperformer given a less-than-heartening atmosphere for cross-border investment globally. According to the latest statistics of the United Nations Conference on Trade and Development, cross-border direct investment worldwide stood at $998.9 billion in 2020, falling below $1 trillion for the first time since 2005 and is unlikely to return to the pre-pandemic level in the following two years.

Second, with declining revenues and profits, multinational corporations are less able and willing to invest and more inclined to have cash in hand. According to the UNCTAD's World Investment Report 2021, cash holdings of the world's top 5,000 non-financial listed companies grew by 25 percent in 2020 to $8 trillion.

Finally, China is being targeted as the global supply chain undergoes reshuffling, with the United States seeking to "decouple" from China by excluding it from the supply chain, tightening technology export controls on China, and exploiting extra-territorial jurisdiction over China-related companies. All this will affect investment in China by multinational corporations, especially high-tech companies.

It is an important aspect of China's opening-up policy to utilize foreign capital, which has played a positive role in the country's economic growth and industrial upgrading. Under current circumstances, China needs to do more to ensure a steady FDI inflow.

First, China needs to further expand foreign investor access in the fields of legal, medical, cultural, information, business and financial services, and begin pilot programs with related risks under control in pilot free trade zones and free trade ports before extending the programs nationwide when possible.

Second, China should fully implement the Foreign Investment Law, the Regulations for the Implementation of the Foreign Investment Law and relevant supporting regulations to shape a modern market system that is holistic, open and transparent, protect the legitimate rights and interests of foreign investors, and level the playing field for domestic and foreign companies. China should also ramp up the "pre-establishment national treatment plus a negative list" management system for foreign investors to ensure the same market access, the same policies, and the same incentives for both domestic and foreign companies in their production and operations.

Third, China must create an enabling framework for FDI by incentivizing local governments to make full use of information technology, bilateral pro-investment mechanisms and exhibitions to promote local business opportunities and projects. China will improve the regulatory framework for foreign mergers and acquisitions and strategic investment in listed companies by easing ownership caps and limits to offer more channels and formats for foreign investment in China.

Finally, China will work for the early entry-into-force of the Regional Comprehensive Economic Partnership Agreement and the early ratification of the China-EU Comprehensive Agreement on Investment, advance China-Japan-ROK FTA negotiations, and actively consider to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership to create a better environment for foreign investment in China. China also needs to make more institutional arrangements for opening-up and adopt international investment rules to facilitate FTA negotiations.

The author is deputy director of the Reform and Opening-up Division of Economic Research Department at the China Center for International Economic Exchanges. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.