The Chinese government’s increased concerns over national security relating to espionage and critical infrastructure hang over the foreign investment landscape, as greenfield foreign direct investment (FDI) reaches another record low.

Greenfield foreign investment projects into China totalled a mere 59 between January and March this year, according to preliminary data from fDi Markets, down by roughly 34% year-on-year on a previous record low of the first quarter of 2022. The total quarterly investment comes to a paltry $3.2bn — another record low and a third of what was tracked over the same period in 2020 and a sixth of the recorded first quarter figure from 2019.

Despite optimism for fresh foreign investment in China following the scrapping of Beijing’s zero-Covid rules, the FDI landscape looks somewhat dampened. Ahead of the revised Counter-Espionage Law coming into effect on July 1, the amorphous threat of ‘national security concerns’ looms large.

After a review conducted by the Cyberspace Administration of China, the Chinese government banned operators of its critical infrastructure from using US chipmaker Micron’s products, citing national security concerns. This, in turn, followed restrictions imposed by the US government last year on the export of semiconductor technologies to China. 

Foreign professional services firms were also thrust into the spotlight this year. Notably, Chinese authorities conducted a raid at US consultancy firm Capvision’s Beijing office in May on the basis that they were safeguarding “national security and development interests”, following a raid on Bain’s offices in Shanghai. Elsewhere, employees at due diligence firm Mintz were detained in Beijing and ‘Big Four’ accounting firm Deloitte was fined and temporarily banned from operating due to failing to meet auditing standards.

Jörg Wuttke, former president of the European Chamber of Commerce in China, said that Beijing carried out these raids as a “deliberate signal to the market”, as if to say: “Watch out!”

According to Mr Wuttke, the Chinese government “wanted to blur foreign companies’ view on the Chinese market”.

“I don’t see any security risks here, but it could be a signpost [from Beijing] to say ‘We actually don’t want foreign companies too deeply embedded in that area unless [we] approve it’,” he added.

One investor stands out among professional services companies looking at the growth of the domestic market: PwC. In 2021, the accountancy firm announced a five-year plan to invest a little over $1bn to support China’s national strategic goals. Last year, it set up a training institute on the southern Chinese island of Hainan. PwC declined to comment on the impact of the recent raids on its investment plans.

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Over recent years, the Chinese government has repositioned itself to attract investment in the high-value manufacturing and services sectors, notably in financial services. In 2019, the State Council opened up the financial sector, easing restrictions for foreign-owned banks and insurance companies entering the Chinese market. 

As the Chinese economy matured from an export-led manufacturing hub and to a sophisticated domestic market, FDI flows were expected to adapt accordingly with more investment in services. But foreign investment flows into areas such as business services have been going in the opposite direction, surpassing levels of investment seen in the early 2000s. In 2022, FDI into business services activities dropped to the lowest amount of capital investment ever recorded. 

This dim picture does not account, however, for the confident commitments made by individual investors. A third of the quarterly inflows in 2023 tracked by fDi Markets came from a single investment: German multinational engineering firm Bosch’s $1bn investment to set up a research and development (R&D) and manufacturing base for new energy vehicles core components and automated driving in Suzhou Industrial Park in the province of Jiangsu.

A recent report co-written by Rhodium Group and the EU Chamber of Commerce in China outlined the dilemma facing many European companies: invest in R&D in China and contend with the associated risks or lose out to domestic competition.  

“The broad spectrum of strategies being employed by European companies are bookended by two opposing views,” it said. One is that is “essential to do R&D in the Chinese market to make the most of the innovation ecosystem and compete for market share with domestic rivals”; the other is that “since China’s system favours local competitors and because technology leakage risks are high, it makes more sense to secure and increase their share in other markets outside China”.