The missed bond repayments and resulting demise of Chinese property developer Evergrande appear to be the latest sign China’s heady high growth years of the 1990s and 2000s are a thing of the past.

With construction projects at a standstill, a third of a trillion dollars in debt and protests outside Evergrande’s Shenzhen headquarters, Hui Ka Yan’s property company has been besieged on all sides. The gilded years of China’s ever greater growth, fuelled by property expansion, appears to be on pause, if not irrevocably hampered.

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This year has proved to be a year of regulatory reform. Starting with the spillover effects of the brief disappearance of magnate Jack Ma following the cancellation of Ant Financial’s Hong Kong debut, the crackdown on Chinese ride-hailing app Didi’s IPO and ensuing data regulations have since paved the way for the recent raft of regulation targeting education companies and video games.

Even before the regulation came out, greenfield foreign direct investment (FDI) into China dropped to a historic low in the first eight months of 2021, according to fDi Markets data — down on its previous record low in the same period of 2020. Only 244 greenfield projects were announced by foreign investors in China between January and August this year, slightly down from the 248 projects over the same period of 2020. 

These investment figures pale in comparison to pre-Covid levels. On average, China racked up 635 greenfield FDI projects between January and August between 2010 and 2019, fDi Markets figures show. Ten years ago, in the first eight months of 2011, during the last year in power of president Xi Jinping’s predecessor, Hu Jintao, China attracted 900 greenfield FDI projects, according to fDi Markets. 

Many believe the high growth FDI we have come to know cannot be sustained in any emerging market and that this is another sign that the market is maturing, as domestic players become more prominent and competition intensifies. Yet there is no doubt that the overhanging geopolitical antagonism and the world's ever-evolving perception of China are also having an effect.

China’s prowess as an FDI destination has been called into question: the World Bank has suspended its Ease of Doing Business rankings after allegations that former World Bank chief Kristalina Georgieva pressured staff to improve China’s score in its rankings. 

Time of change

John Evans, managing director at Tractus Asia, says: “It’s not surprising that FDI is down and I think that’s due to both inward and outward factors.” He says there is a “fundamental change” going on in China, set against heightened risk aversion and uncertainty among his clients generally.

“I don’t think there’s a big demand or appetite from the US companies at this point to make new entrances into China. For the ones that are already there, they’re having to look at evolving strategies [to deal with] the trade war and Covid-19,” he says.

Min Ye, associate professor of international relations at the Pardee School of Global Studies at Boston University, agrees. “I think foreign investors are wise to wait, but [they] need to have good intelligence on the ground in [the country],” she says. “China is presently executing the most aggressive reform since 1998, amounting to establishing a new regulatory state that fits the new economy and restructuring the state-society relationship.” 

Business optimism 

Though greenfield investment is down, foreign businesses that already have a presence in the Chinese market are still posting growth.

In the AmCham Shanghai Annual China Business Report 2021, published in September, 77.1% of US member businesses reported profits in 2020, in line with the past several years, and 82.2% of companies projected full-year revenue growth in 2021 — a return to levels not seen since before the US-China trade war. 

“We looked at revenue, profit and investment and what we found was that investment in 2020 was definitely down, led by retail and automotive,” says Ker Gibbs, president of the American Chamber of Commerce in Shanghai. “But in 2021, 60% of our members said they would increase investment, which is basically back to the pre-trade war levels where 62% [said they would increase investments].”

Such corporate optimism does not detract from the fact that the investment landscape is changing, as China makes the transition from a low-cost manufacturer used by foreign companies for exports, to one of the world’s largest domestic consumer markets. 

“Overall investment has been down since 2012,” Mr Gibbs says. The “high growth in terms of FDI is behind us”, he adds. “That’s not something sinister. It’s really just a reflection of the maturity of the market.”

Foreign decoupling?

Meanwhile, the threat of decoupling looms over many foreign companies, particularly US tech companies. The AmCham Shanghai Annual China Business Report records that almost all non-consumer electronics (90%) and many technology, hardware, software and services companies (85%) listed US–China tensions as a top concern.

Elsewhere, some believe a full-scale US-China decoupling is highly unlikely. As one source, who asked not to be named, put it: “For the US to decouple [from China] would be to walk away from a Japan-size economy that it created.” 

Europeans don’t appear to be as confident, however. A recently published report by the European Union Chamber of Commerce in China contends that the Chinese government’s ambitions for “self-reliance” will have an “extensive, long-term, negative impact”, with a decrease in FDI and a deceleration in innovation. 

Meanwhile, fDi Markets tracked 50 greenfield investment projects from EU member countries into China between January and August 2021 — down by nearly half the number recorded over the same period in 2020.

Country differentiation

South Korea is the country with the highest increase in the number of greenfield projects into China in the first eight months of 2021 relative to last year — up from two projects in 2020 to nine in 2021, according to fDi Markets.

The biggest of these was car manufacturer Hyundai’s $1bn investment to build its first overseas hydrogen fuel cells factory in Guangzhou. “The investment advances [Hyundai’s] global hydrogen leadership and supports its push into China’s rapidly developing hydrogen industry,” a spokesperson for Hyundai told fDi. (They declined to comment on China’s regulatory landscape.)

Derek Scissors, chief economist at China Beige Book, says there is a differentiation among countries engaged with China through trade and FDI.  

“There’s a split among richer countries, which is: is China valuable to you or is it indispensable to you? It’s valuable to pretty much anyone but it’s not indispensable to everyone,” he says, citing Australia as an example of a country that has made concerted efforts to reduce its dependence on China. 

Mr Scissors anticipates that after the Party Congress next year, president Xi Jinping will roll back some of the 2021 regulations during the following year.

This kind of easing would be “great if you’re a foreign investor in 2023 and you’ll be more interested in China”, he says but “until you have some visibility about the political risk, you’re going to assume that these regulations will be implemented and your sector may be next”.

This article first appeared in the October/November print edition of fDi Intelligence. View a digital edition of the magazine here.