By Dezan Shira & Associates

February 14, 2022

(Photo credit): Petersen-Clausen

China recorded record FDI inflows exceeding RMB 1 trillion last year, driven by strong FDI in services. China’s FDI inflows from RCEP member countries are expected to surge this year, with the agreement taking effect on January 1, 2022.

In 2021, China’s actual use of FDI reached RMB 1.149 trillion, an increase of 14.9% over the previous year. In US dollar terms, FDI inflows amounted to $173.48 billion, up 20.2% year-on-year, according to the Ministry of Commerce (MOFCOM).

Last year’s robust double-digit growth is considered remarkable on a relatively high basis in 2020 – China recorded positive growth of 5.7% at a time when global FDI plunged 34.7%.

As for the number of foreign-invested enterprises (FIEs), around 48,000 were registered in 2021, up 23.5% year-on-year. This continues the recovery from a crisis in 2019 which saw the figure fall to 40,910 from 60,560 in 2018.

China has remained the world’s second largest recipient of FDI for four consecutive years, from 2017 to 2020, only after the United States, according to MOFCOM. It even narrowed the gap that year when the United States saw a sharp drop in FDI inflows from $261 billion to $156 billion due to the pandemic.

In 2020, when global FDI fell sharply, China’s actual use of FDI accounted for around 15% of the global total, down from 6.7% recorded in 2015.

According to the United Nations Conference on Trade and Development (UNCTAD), in 2021 global FDI flows rebounded strongly, up 77% to around $1.65 trillion and surpassing pre-Central levels. pandemic. China’s share of global FDI flows is expected to decline somewhat, as FDI in most economies has rebounded, among which FDI flows to the United States more than doubled and to countries in the ‘ASEAN grew by 35%.

A closer look at China’s FDI inflows in 2021

FDI jumps in service industry and high-tech sectors

China’s robust FDI growth in 2021 was fueled by strong investment in services and high-tech sectors.

Total FDI inflow in the services sector increased by 16.7% year-on-year to reach RMB 906.49 billion ($142.77 billion).

High-tech FDI continued to outperform, as the sector saw FDI inflows jump 17.1% year-on-year, measured in Chinese yuan. Of this, high-tech manufacturing increased by 10.7% and high-tech services by 19.2%.

MOFCOM did not reveal any data on manufacturing FDI in 2021. Trends in manufacturing FDI are expected to remain subdued, tempered by the continued diversion of investments towards strengthening supply chain security, according to Fitch Ratings.

FDI growth in China’s central regions has increased

FDI growth in East and West China was reported at similar levels, while China’s central region saw a relatively faster rate of FDI inflows.

In 2021, FDI actually used in China’s eastern, central and western regions increased by 14.6%, 20.5% and 14.2% year-on-year, respectively.

FDI from BRI and ASEAN countries surged

Investments in the Chinese mainland from Belt and Road Initiative (BRI) and Association of Southeast Asian Nations (ASEAN) countries jumped 29, 4% and 29%, respectively.

Fitch Ratings in November 2021 predicted that total FDI in China would see more inflows from the 14 member countries of the Regional Comprehensive Economic Partnership (RCEP), which comes into effect this year.

RCEP member countries, which include Singapore, South Korea and Japan, together accounted for 42% of China’s total FDI in 2020, excluding Hong Kong and Macao (a large share of Hong Kong and Macao come from Chinese companies).

As the COVID-19 pandemic, volatile political environment and rising input costs continue to pose challenges, the Chinese government has pledged to stabilize FDI and foreign trade this year.

At a press briefing on Jan. 25, Chen Chunjiang, director general of the Ministry of Commerce’s Foreign Investment Administration Department, said China will step up efforts to open up its market and optimize support measures this year.

China will implement the 2021 version of negative lists for foreign investment. National and Free Trade Zone (FTZ) negative lists updated in 2021 reduced the number of sectors in which foreign investors are restricted or prohibited. Among other things, the lists removed limits on foreign ownership in passenger car manufacturers.

The government will also expand the catalog of industries encouraging foreign investment, taking advantage of preferential land and taxation policies to attract more foreign capital in advanced manufacturing, modern services, high-tech sectors, industrial low-carbon and green, digital economy and in the central and western regions.

China will also promote the entry into force of RCEP this year and allow an unprecedented level of access to its markets with the aim of joining the Agreement for Comprehensive and Progressive Trans-Pacific Partnership (CPTPP).

Chen also promised that China will further optimize its business environment, ensure the effective enforcement of foreign investment laws and regulations, establish the complaint mechanism for FIEs, protect intellectual property rights (IPRs) and equal treatment for domestic and foreign companies. .

This article first appeared on China Briefing, produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices around the world, including China, Hong Kong, Vietnam, Singapore, India and Russia.