Foreign direct investment (FDI) into China is set to increase in 2023, analysts tell fDi, following record low levels of greenfield investments in 2022, as multinationals balance diversification with consolidation in the country.
With Covid-19 case numbers slated to reach their first peak on January 13, with 3.7 million cases a day, according to health analytics company Airfinity, there is an expectation that foreign firms in China might benefit from greater clarity after long-standing frustration over Beijing’s zero-Covid policy. As of January 8, China has scrapped its quarantine restrictions on inbound travellers but remains closed to tourists.
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“As the Covid tidal wave washes over China, there is pent-up investment spending in the system,” says Leland Miller, CEO of China Beige Book, an advisory company. “FDI into China will have bottomed out by the end of 2022.”
As the Covid tidal wave washes over China, there is pent-up investment spending in the system.
Between January and November, greenfield investments into China totalled a paltry 271 projects at an estimated capital expenditure of $14.4bn, according to fDi Markets. This is the worst January–November performance for FDI into China on record, and a significant drop from the 381 projects worth $27.5bn tracked last year. This follows the worst first-half year ever for greenfield FDI and years of increased investor wariness over doing business in China.
China’s net FDI as a percentage of gross domestic product (GDP) fell to 0.1% in 2022 and is set to rise to 0.5%, according to World Bank forecasts published in December.
Mr Miller cautions, however, that China’s bid to open up is something of a “hiatus” in its engagement with the rest of the world and does not expect this to herald an era of fewer geopolitical tensions. The Chinese government has already lifted its two-year unofficial ban on coal imports from Australia.
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A balancing act
Kamala Raman, vice president of supply chain research at management consultant company Gartner, says that “companies are coming to terms with the fact that they cannot simply diversify away from China nor double down on China”. “The biggest players are hedging their bets by doing both,” she adds.
Companies are coming to terms with the fact that they cannot simply diversify away from China nor double down on China.
US tech giant Apple is expected to use Chinese manufacturer Luxshare to assemble its premium iPhone models, the Financial Times reported on January 4, following worker protests that hit Taiwanese chip giant Foxconn’s plant in Zhengzhou last year.
Apple has also made parallel inroads into India, with the company likely to move a quarter of its iPhone 14 production there by 2025, Reuters reported in September citing a 2022 analysis by JP Morgan.
“Doubling down could be read either as expanding operations in the country, or cementing a strong position and perhaps re-arranging partners or how you do things in China,” Ms Raman says, stressing that what Chinese factories can offer manufacturers in terms of volumes and quality of goods remains unrivalled globally.
That said, the ‘China+1’ strategy, whereby businesses keep some of their assembly in China and move part of it elsewhere, will continue, she adds, with Vietnam, India, Malaysia and even Taiwan continuing to benefit from the “trickle of FDI out of China”.
As for China’s prospects for domestic growth in the coming year, Alicia García-Herrero, chief economist for Asia Pacific at investment bank Natixis, says “it is better than 2022, but we’re still not out of the woods”.
One aspect of the lifting of Covid restrictions means that consumption can resume but Ms García-Herrero says that “even if consumption will recover, it will not recover as much as it did in 2021”.
Natixis estimates that GDP growth in China will swell to 5.5% this year, up from 3% last year, while the IMF puts China’s GDP growth for 2023 at 4.4%, up from 3.2% in 2022.